Brinker (EAT) Grapples With High Costs, Soft Industry Trends

On Aug 22, we issued an updated research report on Brinker International Inc. (NYSE:EAT) .

The company primarily owns, operates, develops and franchises various restaurants under Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s) brands.

Shares of Brinker have majorly underperformed the industry year to date. The shares of the company have declined 32.9% as against the industry’s gain of 5.6%.

Additionally, the company is witnessing a downward movement in earnings estimates, mirroring soft stock prospects.

Over the past one month, current quarter and year earnings estimates have declined 4.2% and 0.6%, respectively.

Concerns

Over the past few quarters, the U.S. restaurant space has not been experiencing spectacular revenue growth due to lower consumer demand and other macro economic challenges.

Thus, same-store sales growth has been dull in a difficult sales environment. Traffic has also been weak. In fact, the second quarter of 2017 marked the sixth consecutive quarter of negative comp sales for the restaurant industry as a whole, thereby continuing the somber mood. As a result, the company’s sales have been under pressure.

Meanwhile, Brinker has a substantial exposure in Texas, Louisiana and Oklahoma, with 17% of its restaurants located the regions. These states are highly dependent on the oil industry and thus the volatility in the energy sector is hurting the region’s overall economy and consumer spending.

Additionally, higher labor costs due to increased wages and costs incurred due to the implementation of the Affordable Care Act are expected to continue to keep profits under pressure. Moreover, expenses related to various sales boosting initiatives including advertising expenses are expected to continue to hurt margins.

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

Brinker’s international comps might also be under pressure due to a slowdown in some of the international markets. The company is highly exposed to various emerging nations, which have been exhibiting decelerating growth for some time due to various macro headwinds. This might limit discretionary spending, hurting the company’s top line.

Initiatives Offer Some Respite

Brinker is focused on its goal to drive traffic and revenues through a range of sales-building initiatives such as streamlining of menu and its innovation, better food presentation, advertising campaigns, kitchen system optimization and introduction of a better service platform. Additionally, it is investing heavily in technology-driven initiatives like online ordering to augment sales and guest services.

Given the fact that fiscal 2017 has been a challenging year for the Chili’s business, the company is making critical investments in the brand to mark a turnaround. It believes that a simpler menu, better quality, faster execution and stronger value might act as catalysts for Chili's.

Meanwhile, at Maggiano's, the company is poised to continue delivering differentiated dining experience with the rollout of a new menu. The new menu expands dining options to drive incremental visits and includes a brunch offering. Since its launch in early March, management has noted improved momentum in sales and guest satisfaction, especially with weekend brunch.

Moreover, we expect Brinker’s remodeling initiative to continue invigorating its potential as a brand and enhance guests’ experience.

Zacks Rank and Stocks to Consider

Brinker currently carries a Zacks Rank #4 (Sell).

Better-ranked stocks in this sector include Papa John's International, Inc. (NASDAQ:PZZA) , Domino's Pizza, Inc. (NYSE:DPZ) and Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) . All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Papa John’s 2017 earnings increased 1.4%, over the past 60 days. Moreover, the company’s trailing four-quarter average earnings surprise is a positive 5.10%.

Domino’s earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 6.75%. Meanwhile, for 2017, EPS is projected to witness a rise of 33.8%.

Dave & Buster's trailing four-quarter average earnings surprise is a positive 30.50%. For fiscal 2017, EPS is expected to improve 23.5%.

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