Here's Why Chili's Is Eating Red Lobster's and Ruby Tuesday's Lunch

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Brinker International
Casual dining stocks aren't dead as an investment category. Investors just need to know where the tasty treats can be found on the menu.

Chili's Grill & Bar parent Brinker International (EAT) moved higher on Wednesday after reporting better than expected quarterly results. Company sales climbed higher, fueled by a 0.3 percent increase in comparable-restaurant sales. Its international locations fared even better.

Some casual dining chains that are bucking the general downward trend and posting positive comps are doing so by discounting aggressively to keep patrons coming. But that's not Chili's game at all. Net margins actually expanded nicely at Brinker, with adjusted earnings per share climbing 18 percent during its fiscal second quarter.

The 1,557-unit Chili's chain is doing just fine. But the same can't be said about its competition.

Red Ink, Ruby Ink

Seeing shares of Brinker open 8 percent higher after posting better than expected quarterly results may be painful for investors in Ruby Tuesday (RT) or Red Lobster parent Darden Restaurants (DRI). Those two stocks took a hit the last time they offered up fresh financials.

Ruby Tuesday and Red Lobster are falling out of favor with the hungry, with comps plunging 7.8 percent and 4.5 percent respectively in their latest quarters. Both companies have fallen short of Wall Street profit targets in each of their past three quarters. Brinker, on the other hand, has now surpassed bottom-line expectations in three of the past four quarters.

With Ruby Tuesday's profits turning to losses and Darden so disillusioned with Red Lobster that it's looking to sell it or spin it off, it's easy to see why savvy investors looking at the casual dining sector are turning to Brinker. The stock hit a new 52-week high on Wednesday, and this could be just the beginning.

Tech is the Secret Ingredient

Why is Chili's succeeding at a time when profits at many of its peers are receding? Barron's argued earlier this month that Chili's is in the sweet spot of serving low-priced meals to high-income consumers. It's the other way around at Red Lobster: Seafood isn't cheap, and affluent foodies looking for it choose to frequent more upscale eateries or indie-owned chains.

Chili's should keep growing in 2014 -- and not just because the economy is at last showing signs of vitiality, or because people are eating out more again in general.

Chili's also has technology on its side. Back in September, it announced that it would be teaming up with Ziosk to install touchscreen tablets at every table. Unlike DineEquity's (DIN) Applebee's, which also plans to roll out tablets at every table later this year, the tablets at Chili's will be merely for ordering drink refills and dessert, and for paying the bill at the end of the meal. That's not quite as ambitious a plan as they have at Applebee's, where the tablets will allow entire orders to be placed.

If casual dining can't compete with the quality of fine dining or the speed of fast food and fast casual, it can at least make the time spent at the restaurant more engaging by providing games and other diversions for diners as they wait for their food.

Chili's is at the forefront of tech in casual dining, and it seems to be serving the right food at the right price points to the right people. Ruby Tuesday, Red Lobster, and other laggards aren't keeping up. So it may be too late to order something else off the growth menu.



(Correction: A previous version of this article incorrectly stated that customers can't use Chili's tabletop touchscreen tablets to pay for their meals. This feature has been part of the system since it was rolled out in September.)

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.

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