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Brinker International: Meat, Cheese, Avocados Cost More To EAT

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Brinker International’s key costs of operation

In the last part of this series, we learned that Brinker International (EAT) had mid-single-digit year-over-year, or YoY, revenue growth.

It’s important for a company to efficiently manage its costs. In this part of the series, we’ll look at Brinker’s key costs.

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Operating expenses

As you can see in the chart above, all of Brinker International’s key costs declined as a percentage of sales in 2Q15. Cost of sales was 26.9% in the first quarter as a percentage of sales, compared to 27% in the same quarter last year. The company’s cost of sales benefitted 0.5% from a menu price increase, 0.3% from improvement in mix, and from waste-control measures.

Brinkers confirms that it has contracted 67% of its commodities through fiscal 2015. Commodity prices affected the company by 0.7% in the quarter. Increases primarily came from three ingredients—burger meat, cheese, and avocados. Higher salmon costs also impacted the company’s cost matrix.

Chipotle Mexican Grill (CMG) saw inflation related to these three ingredients affect its own costs as well.

Labor costs declined to 31.7% because of higher sales leverage. This is a decrease of 40 basis points year-over-year. One basis point is one hundredth of a percentage point.

The decline was offset by minimum wage increases, which affects many restaurants including McDonald’s (MCD), Starbucks (SBUX), and Dunkin’ Brands (DNKN) along with other restaurants that are included in the Consumer Discretionary Select Sector SPDR Fund (XLY).

Restaurant expenses declined by seven basis points to 24.91%. General and administrative expenses increased by nine basis points as a percentage of sales to 4.38% due to higher compensation expenses.

Operating margins tightened

The company reported total operating expenses of $677 million. This was a 5.6% increase YoY compared to $641 million in the same quarter last year.

Operating income was $65 million, growing 1.8% YoY. Operating margins also declined to 8.8% year-over-year from 9.1%.

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