Brinker Banks On Sales-Driving Initiatives Amid Industry Woes

Challenging industry conditions have been hurting most restaurant chains of late, Brinker International Inc. (NYSE:EAT) being no exception.

With 17% of its restaurants located in Texas, Louisiana and Oklahoma, the recent Harvey and Irma hurricanes have had a substantial impact on the company’s first-quarter fiscal 2018 operational results.

Nevertheless, we are positive on various operational, remodeling and digital initiatives undertaken by the company that should drive growth amid the challenges.

Key Growth Drivers

The Texas-based casual-dining restaurant — operating under Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s) brands — is steadfast in its goal to drive traffic and revenues through a range of sales-building initiatives such as streamlining of menu and its innovation, strengthening its value proposition, enhanced food presentation, better advertising campaigns, kitchen system optimization and introduction of an improved service platform.

Given the fact that fiscal 2017 has been a challenging year for Chili’s, the company is making substantial investments in the brand in a bid to turn around.

In first-quarter fiscal 2018, the company presented a new menu with 40% fewer items than a year ago, supported by an aggressive marketing plan. Brinker believes that a simpler menu, better quality, faster execution and stronger value are likely to help revive the Chili's business.

For the rest of the year, Brinker plans to focus on marketing and operational execution that will drive traffic and market traction.

At Maggiano's, the company is likely to continue delivering a differentiated dining experience. The latest menu, including a brunch offering, expands dining options to drive visits. Since its launch in early March, management has noted improved sales and guest satisfaction, courtesy of the weekend brunch offering. Meanwhile, despite the impact of the hurricanes, Maggiano's To-go and Delivery services have improved considerably and are likely to drive profits.

Brinker is one of the few fast-casual restaurant chains that have been expanding despite sluggish economic conditions. The company is gearing up to expand internationally as well, especially in the faster-growing emerging markets. Brinker expects to open 38 to 43 restaurants globally in fiscal 2018 which will include new markets like Panama, Chile and Vietnam.

Over the past few quarters, Brinker’s remodeling efforts have gained momentum and are expected to continue to strengthen its potential as a brand and augment guests’ experience.

Brinker is also investing heavily in technology-driven initiatives like online ordering, to augment sales and guest services. The company has implemented handheld devices in all of California, which is boosting efficiency and speed. Also, the company’s To-Go platform has been the fastest growing segment.

Concerns

Revenues in the U.S. restaurant space have been facing the brunt of a shift in consumer taste and preferences over the past few quarters. Most restaurants have been facing declining comps as a result of weak traffic. Owing to this, Brinker’s sales are expected to remain under pressure in the upcoming quarters as well. Meanwhile,the company’s international comps might also be under pressure in the coming quarters, due to a slowdown in some of the international markets that it operates in.

Moreover, Brinker is weighed down by higher costs related to various sales-boosting initiatives, including advertising. Increased labor costs and commodity inflation are also expected to hurt margins.

In fact, the company expects restaurant operating margin decline of 25 to 40 basis points in fiscal 2018 as it invests specifically in core food equities.

Notably, the company’s shares have lost 31.2% year to date as against the industry’s gain of 10.7%. Earnings estimates for the current quarter and year have also gone down over the past two months by 4.1% and 1.2%, respectively. Meanwhile, the company missed earnings estimates in two of the trailing four quarters.

Zacks Rank and Stocks to Consider

Brinker currently has a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Retail-wholesale sector include Farmer Brothers Company (NASDAQ:FARM) , Arcos Dorados Holdings Inc. (NYSE:ARCO) and Sprouts Farmers Market, Inc. (NASDAQ:SFM) .

All the three companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Farmer Brother’s current-year earnings are expected to grow 2.9%.

Current-year earnings for Arcos Dorados are likely to rise 16.2%.

Sprouts Farmers’ current-year earnings are expected to increase 17.5%.

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