Brin inker In International, , In Inc. . (E (EAT): VALUEx Z - - PowerPoint PPT Presentation

Brin inker In International, , In Inc. . (E (EAT): VALUEx Züric ich-Klosters

John M. Zolidis

• Jan. 30- Feb. 1, 2019

Presentation Outline

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Speaker Bio Slide 3 Investment Thesis Slide 4 What is Brinker International, Inc. (EAT) Sides 5 Review of Valuation & Sentiment Slide 7-10 State of the U.S. Restaurant Industry Side 11-13 Recent Results and Forecasts Slides 15-20 Cash flow and Capital Return Slides 21-22 Investment recap, risks Slide 23-24 Disclosures Slide 25

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Presenter Bio – John Zolidis

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➢ Founded Quo Vadis Capital, a research boutique and Registered Investment Advisor in 2017 ➢ Analyst following U.S. consumer sector since 1999 ➢ Education at Kenyon College & Oxford University (Mansfield College) ➢ Named to Wall Street Journal’s Best on the Street list in 2005 ➢ Based mostly in Paris, France

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Investment Thesis to Prove

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EAT initiatives have produced a positive inflection in traffic and sales which have not yet been recognized by the investment community. We see the potential for upward revisions to current estimates and valuation expansion for a stock that trades near the lowest multiples in its peer group and has an embedded buyer with 30% of shares outstanding sold short.

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Brinker International, Inc. (EAT) Overview

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Brinker International is a mature restaurant company with two casual dining concepts: Chili’s and Maggiano’s ➢ 1,686 total restaurants ➢ Most recent fiscal year revenues were $3.1B, of which 84% came from U.S. company-operated Chili’s, 13% from Maggiano’s, and 3% franchisee fees. ➢ EBITDA margin: 13% most recent fiscal year ➢ FY19E Capex ~$145M (4.5% of sales) ➢ Capital Structure: $1.26B LT debt, $855M Shareholders’ deficit (4x leverage) ➢ FY18 Free cash flow was $183M (~$4/ share); ➢ Recent price $42.00 on the U.S. exchange, current market cap: $1.7B As company-operated Chili’s generate the vast majority of sales and earnings our presentation will only focus on this division. Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Brinker (EAT) Recent Stock Price Performance:

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Two Year Chart:

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Valuation and Sentiment Overview

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EAT is trading below its 5-year average P/E (red line) (2-year PE chart):

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Valuation and Sentiment Overview

8

EAT is trading below its 5-year average EV/ EBITDA (red line) (2-year chart):

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Valuation and Sentiment Overview

9

Recent Uptick in Buy Ratings but Still Only 30% of Analysts Recommend:

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Valuation and Sentiment Overview

10

Among the cheapest on P/E and EV/ EBITDA with highest short interest (30%)

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

1/29/2019 AVG. BJRI CAKE CBRL CHUY CMG EAT HABT NDLS PLAY RRGB SBUX SHAK TACO TXRH YUMC

Recent Price $52.71 $44.73 $169.0 $21.31 $530.3 $42.0 $10.60 $7.10 $50.95 $32.85 $66.98 $48.21 $10.68 $61.05 $36.14 Mkt Cap ($B) $1.1 $2.1 $4.1 $0.4 $14.9 $1.7 $0.3 $0.3 $2.0 $0.4 $84.0 $1.8 $0.4 $4.4 $14.2 ENT VALUE ($B) $1.2 $2.2 $4.4 $0.4 $14.7 $2.9 $0.3 $0.4 $2.4 $0.6 $84.5 $1.7 $0.6 $4.2 $12.7 Valuation Metrics

• Vs. 2018E EPS (P/E)

28.0x 22.4 18.3 18.3 24.0 62.0 12.0 NM NM 18.1 19.6 27.7 70.8 18.9 27.9 23.7

• Vs. 2019E EPS (P/E)

27.0x 21.2 16.7 18.6 22.5 44.2 11.1 NM 50.8 16.8 18.6 24.6 67.3 18.6 23.9 22.4 EV / 2019 Sales 1.5x 1.0 0.9 1.4 0.8 2.8 0.9 0.6 0.8 1.7 0.5 3.2 3.0 1.1 1.6 1.4 EV / 2018E EBITDA 12.3x 9.5 9.5 11.2 9.8 27.5 7.3 8.6 11.7 8.7 5.2 15.1 27.2 8.5 14.5 9.9 EV / 2019E EBITDA 11.0x 9.0 8.9 11.0 8.8 22.3 7.0 7.9 10.0 8.0 5.1 14.5 22.0 8.3 12.6 9.6 Free Cash Flow Yield ('18) 2.6% 5.6% 1.7% 0.3% N/A 1.6% 7.1%

• 6.7%

N/A 3.0% 9.5% N/A 0.0% 2.2% 1.1% 5.5% Dividend Yield 1.0% 0.3% 2.1% 5.9% 0.0% 0.0% 3.1% 0.0% 0.0% 0.0% 0.0% 2.0% 0.0% 0.0% 1.6% 0.2% EV/ NTM EBITDA 5-Year Valuation History HIGH 21.5 13.9 11.7 12.1 21.6 29.3 10.2 22.6 22.6 11.6 9.9 18.4 99.0 11.0 15.8 13.4 LOW 8.1 6.2 7.1 8.5 6.3 12.4 6.7 8.2 5.1 6.8 4.4 12.3 21.0 0.9 8.4 7.4 AVERAGE 11.8 9.4 9.6 10.0 11.6 19.6 8.5 11.7 11.0 9.0 7.1 14.6 25.7 8.1 11.1 10.0 Current EV/ EBITDA on FY19 Compared to 5-Year Average % Premium or Discount

• 8%
• 5%
• 7%

9%

• 24%

14%

• 18%
• 32%
• 10%
• 11%
• 28%

0%

• 14%

2% 14%

• 3%

Sentiment Short Interest 12% 20% 19% 14% 9% 9% 31% 7% 9% 14% 23% 3% 12% 5% 5% 1% % buys 40% 44% 17% 22% 0% 35% 30% 50% 50% 100% 27% 48% 31% 63% 19% 60% % holds 51% 44% 74% 56% 88% 44% 55% 50% 38% 0% 73% 52% 46% 38% 67% 40% % sells 9% 13% 9% 22% 13% 21% 15% 0% 13% 0% 0% 0% 23% 0% 14% 0% Source: FactSet Note: EPS and EBITDA Estimates for CRBL are based on July YE, SBUX based on Sep. YE, EAT based on June YE

Quo Vadis Capital, Inc. Restaurant Universe Relative Growth, Profitability, Balance Sheet & Valuation Metrics (Consensus Forecasts)

The question you should be asking: Why is everyone so negative?

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Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

U.S. Restaurant Industry Overview

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Traffic at existing restaurants has fallen every quarter for more than three years due to overcapacity, increased competition from grocery and other sources & possibly popularity of cooking:

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Source: Black Box

Restaurant Industry YOY% Change in Quarterly Traffic

• 2.1%
• 2.4%
• 3.2%
• 3.4%
• 4.4%
• 3.6%
• 3.1%
• 4.2%
• 1.9%
• 2.6%
• 2.0%
• 1.3%
• 1.6%
• 5.0%
• 4.0%
• 3.0%
• 2.0%
• 1.0%

0.0% 1.0% 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Black Box Traffic

U.S. Restaurant Industry Overview

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Meanwhile labor costs have deleveraged ~250 bps over three years for the industry and are likely to continue to rise faster than sales in 2019

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Source: Company Reports & Quo Vadis Capital, Inc. estimates

AVERAGE -- Labor as a % of Restaurant Sales

30.1% 30.1% 30.4% 30.6% 31.0% 31.3% 31.5% 31.7% 31.8% 31.9% 32.0% 32.2% 32.4% 32.5% 29.5% 30.0% 30.5% 31.0% 31.5% 32.0% 32.5% 33.0%

Given the traffic & labor dynamic why get involved?

Company-specific initiatives have produced a positive inflection in traffic and we estimate upside to existing estimates. Meanwhile cash flow, and return of capital dynamics are favorable for shareholders and short interest provides a potential kick.

14

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Positive Inflection in Key Metrics Including Traffic

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At Chili’s, starting in 2HCY18 EAT cut 1/3 of menu items, invested in quality and value which improved speed of service and guest satisfaction, resulting in an improved trend in traffic and same-restaurant sales. In 2HFY18 Chili’s layered on a new to-go platform, driving a 20% increase to 12% of sales in the December 2018 quarter.

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Source: Company reports and Quo Vadis Capital, Inc. estimates

Chili's Same-Restaurant Transactions YOY% Change Chili's Same-Restaurant Sales YOY% Change

• 5.1% -5.2% -5.1%
• 6.2%
• 3.8%
• 2.0%

0.7% 4.0% 2.9%

• 8.0%
• 6.0%
• 4.0%
• 2.0%

0.0% 2.0% 4.0% 6.0%

Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A

POSITIVE INFLECTION

• 3.3%
• 2.3% -2.2%
• 3.3%
• 1.5%
• 0.4%

0.8% 2.0% 2.7%

• 5.0%
• 4.0%
• 3.0%
• 2.0%
• 1.0%

0.0% 1.0% 2.0% 3.0% 4.0%

Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A

Positive Inflection in EPS Growth

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Slightly better sales, a lower corporate tax rate and a significant reduction in the share count due to repurchase (partially funded by a sale-leaseback of previously owned real estate) has created a positive inflection in EPS growth.

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Figure 3. Source: Company reports and Quo Vadis Capital, Inc. estimates

TTM EPS Sequential Change in TTM EPS

$3.58 $3.50 $3.22 $3.15 $3.31 $3.46 $3.57 $3.62 $3.64 $3.83 $2.70 $2.90 $3.10 $3.30 $3.50 $3.70 $3.90

Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A Mar19E

8.9%

• 2.0%
• 8.1%
• 2.2%

5.1% 4.5% 3.2% 1.5% 0.4% 5.2%

• 10.0%
• 8.0%
• 6.0%
• 4.0%
• 2.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A Mar19E

POSITIVE INFLECTION

However, Consensus does not believe it:

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Going forward, consensus estimates reflect analyst skepticism. We believe momentum may actually accelerate, rather than slow. These charts show same-store sales and total revenue estimates.

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Consensus Same-Store Sales YOY % Change Consensus Total Quarterly Revenues YOY % Change

• 1.7%
• 8.1%
• 2.5%
• 0.6%

0.2% 0.8% 2.0% 1.7% 1.7% 1.4%

• 10.0%
• 8.0%
• 6.0%
• 4.0%
• 2.0%

0.0% 2.0% 4.0%

Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18E Mar19E Jun19E

CONSENSUS MODELS A MODERATING OF IMPROVING TREND

• 2.2%
• 1.8%
• 3.3%
• 1.0%
• 0.4%

0.6% 1.8% 1.3% 0.9% 0.9%

• 4.0%
• 3.0%
• 2.0%
• 1.0%

0.0% 1.0% 2.0% 3.0%

Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18E Mar19E Jun19E

CONSENSUS MODELS A MODERATING OF IMPROVING TREND

However, Consensus does not believe it:

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Going forward, consensus estimates reflect analyst skepticism. We believe momentum may actually accelerate, rather than slow. These charts show forecasts for EPS growth to decelerate.

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Source: Company Reports, FACTSET, Quo Vadis Capital, Inc. estimates

Consensus Quarterly EPS Consensus Quarterly YOY Change in EPS

• 6.5%
• 11.5%
• 14.4%

22.7% 15.8% 10.1% 12.9% 3.0% 8.5% 6.5%

• 20.0%
• 15.0%
• 10.0%
• 5.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18E Mar19E Jun19E

CONSENSUS MODELS A MODERATING OF IMPROVING TREND

$0.94 $1.09 $0.42 $0.87 $1.08 $1.20 $0.47 $0.89 $1.18 $1.28 $0.07 $0.27 $0.47 $0.67 $0.87 $1.07 $1.27 $1.47

Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18E Mar19E Jun19E

Which is Leading to Upside to Estimates:

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During the December quarter, EAT produced the largest upside to Street comp and total revenue forecasts in many years

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Source: Company reports, FactSet and Quo Vadis Capital, Inc. estimates

% POINT UPSIDE (DOWNSIDE) TO CONSENSUS COMPS % UPSIDE (DOWNSIDE) TO CONSENSUS TOTAL REV. EST.

• 1.9%
• 1.0%
• 0.1%
• 1.5%
• 1.0%

0.5% 0.0%

• 0.2%

1.3%

• 2.5%
• 2.0%
• 1.5%
• 1.0%
• 0.5%

0.0% 0.5% 1.0% 1.5% 2.0%

Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A

DEC Q REVS VS. STREET ALSO BEAT NICELY

• 1.6%
• 0.5%
• 0.1%
• 1.4%
• 1.1%

0.2%

• 0.4%

0.0% 1.3%

• 2.0%
• 1.5%
• 1.0%
• 0.5%

0.0% 0.5% 1.0% 1.5%

Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A

BIGGEST COMP BEAT IN SOME TIME

Which is Leading to Upside to Estimates:

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Investors were disappointed when the December quarter beat did not flow through to the bottom line. However, we believe the direction of revisions to both the top-and bottom-line remains favorable:

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Source: Company reports, FactSet and Quo Vadis Capital, Inc. estimates

EPS UPSIDE (DOWNSIDE) TO CONSENSUS ESTIMATE % UPSIDE (DOWNSIDE) TO CONSENSUS EPS ESTIMATE

$(0.03) $0.09 $0.05 $- $0.15 $0.01 $- $0.02 $- ($0.05) $0.00 $0.05 $0.10 $0.15 $0.20

Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A

DEC Q EPS IN-LINE IN DEC QUARTER DESPITE REVS

• 4.1%

10.6% 4.8% 0.0% 20.8% 0.5% 0.0% 4.4% 0.0%

• 10.0%
• 5.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A

EIGHT QUARTERS IN-LINE OR ABOVE STREET

Capital Allocation Review: Cash Flow & Capital Return Create Downside Protection

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FCF/ share has exceeded EPS in 7 of past 8 years and should continue to exceed EPS going forward. Meanwhile, EAT’s dividend has grown at a 14% CAGR over the past 10 years.

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Source: Company reports and Quo Vadis Capital, Inc. estimates

ANNUAL FCF PER SHARE FY11-FY20E ANNUAL DIVIDENDS PER SHARE FY11-FY20E

$2.21 $2.15 $2.97 $3.55 $4.80 $4.10 $3.96 $4.40 $5.10 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00

2012A 2013A 2014A 2015A 2016A(1) 2017A 2018A 2019E 2020E

$0.64 $0.80 $0.96 $1.12 $1.28 $1.36 $1.52 $1.56 $1.66 $0.00 $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $1.40 $1.60 $1.80

2012A 2013A 2014A 2015A 2016A(1) 2017A 2018A 2019E 2020E

Capital Allocation Review: Cash Flow & Capital Return Create Downside Protection

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EAT has significantly reduced shares outstanding, buying back over a quarter

• f the company in the past two years.

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Source: Company reports and Quo Vadis Capital, Inc. estimates

YOY Change in Share Count Quarter End Share Count Period End

• 16%
• 14%
• 12% -12%
• 7%
• 7%
• 12%
• 16%
• 17%
• 20%
• 25%
• 20%
• 15%
• 10%
• 5%

0%

Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A Mar19E

50.5 49.5 49.4 48.7 46.9 46.0 43.5 41.1 38.8 37.0 25 30 35 40 45 50 55

Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A Mar19E

23% REDUCTION IN SHARES OUT OVER TWO YEARS

Investment Recap:

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➢ Recent company-led initiatives have produced a positive inflection in traffic & sales which together with a lower tax rate and share count have led to a positive inflection in EPS growth ➢ The Sell-side is skeptical and modeling moderating improvement going forward, we think the opposite could happen and thus see upside to earnings. ➢ Shares trade at among the lowest multiples of a peer group and have a 30% short interest, indicating that the buy-side is also not on board ➢ Factoring in 5% estimated upside to current forecasts and valuation expansion to 9x EV/ EBITDA (slightly above average) = $60 stock (43+% upside +3% dividend) in a bullish scenario. ➢ Consistent FCF generation and return of capital provides downside protection

➢ Dividend growth = 14% CAGR over 10 years; Should continue to go up ➢ Repurchased more than a quarter of shares out over past two years; Expect to continue

Brinker International, Inc (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Risks & Other Considerations

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➢ Competition in the restaurant industry is intense and Chili’s is exposed to promotional offers from other casual diners ➢ We expect labor cost pressure to continue to rise ➢ After 1H19 we will lap the benefit of tax reform on consumer spending ➢ The U.S. economy may be slowing and restaurants are economically sensitive ➢ Future new menu items or promotions may not be successful

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com

Disclosures

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General Disclosures: Quo Vadis Capital, Inc. (“Quo Vadis”) is an independent research provider offering research and consulting services. The research products are for institutional investors only. The price target, if any, contained in this report represents the analyst’s application of a formula to certain metrics derived from actual and estimated future performance of the company. Analysts may use various formulas tailored to the facts and circumstances surrounding a specific company to arrive at the price target. Various risk factors may impede the company’s securities from achieving the analyst’s price target, such as an unfavorable macroeconomic environment, a failure of the company to perform as expected, the departure of key personnel or other events or circumstances that cannot be reasonably anticipated at the time the price target is calculated. Quo Vadis may change the price target on this company without

• notice. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from

sources Quo Vadis believes to be reliable; however, Quo Vadis does not guarantee its accuracy and does not purport to be complete. Opinion is as of the date of the report unless labeled otherwise and is subject to change without notice. Updates may be provided based on developments and events and as otherwise appropriate. Updates may be restricted based on regulatory requirements or other considerations. Consequently, there should be no assumption that updates will be made. Quo Vadis disclaims any warranty of any kind, whether express or implied, as to any matter whatsoever relating to this research report and any analysis, discussion or trade ideas contained herein. This research report is provided on an "as is" basis for use at your own risk, and neither Quo Vadis nor its affiliates are liable for any damages or injury resulting from use of this information. This report should not be construed as advice designed to meet the particular investment needs of any investor or as an offer or solicitation to buy or sell the securities or financial instruments mentioned herein. This report is provided for information purposes only and does not represent an offer or solicitation in any jurisdiction where such offer would be prohibited. Commentary regarding the future direction of financial markets is illustrative and is not intended to predict actual results, which may differ substantially from the opinions expressed herein. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. The analyst who is the author of this report does not have a position in shares of the companies that are the subjects of this report. However, Quo Vadis prohibits analysts from trading in a way that is inconsistent with opinions expressed in reports [subject to exceptions for unanticipated significant changes in the personal financial circumstances of the analyst]. This report may not be reproduced in part or in whole. Please do not redistribute this report. Reg AC Certification: All of the views expressed in this research report accurately reflect the research analyst's personal views about any and all of the subject securities or

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expressed by the research analyst in the subject company of this research report.

Brinker International, Inc. (EAT) John Zolidis

john.zolidis@quovadiscapital.com