On Wednesday, Morgan Stanley maintained its underweight rating and $50.00 price target on shares of Brinker International (NYSE:EAT), a company known for its Chili's Grill & Bar and Maggiano's Little Italy restaurant chains. The firm's stance comes despite acknowledging the impressive sales performance of the company in the fourth fiscal quarter, which saw Chili's comparable store sales increase by 15%.
Brinker International's recent earnings report revealed a mixed outcome. While the company's sales figures were strong, with Chili's traffic up by 6%, the earnings did not fully meet the more optimistic expectations some held. This shortfall was attributed to a modest miss in restaurant-level margins (RLM) and higher general and administrative expenses, largely driven by incentive compensation.
Looking ahead, Brinker International has provided an earnings per share (EPS) guidance for fiscal year 2025 that falls short of both the Street's and Morgan Stanley's expectations, as well as most investor projections. Despite sales figures trending higher, the company plans to continue reinvesting in its business, a strategy aimed at long-term brand improvement. This approach may resonate with patient investors, but those expecting immediate bottom-line rewards from the 15% comparable store sales growth may reconsider their positions.
Morgan Stanley's underweight rating is partly based on the view that Brinker International's story cannot rely solely on increased customer traffic. The firm believes that a more comprehensive plan for bottom-line growth is necessary to drive the stock's value further, especially considering the stock has already experienced a significant re-rating.
As of now, the anticipated bottom-line plan to support the stock's ascent remains unclear, even as customer traffic has shown considerable improvement.
In other recent news, Brinker International reported its fourth quarter earnings, which fell short of analyst expectations, despite surpassing projected revenues. The restaurant operator posted adjusted earnings per share of $1.61, missing the consensus estimate of $1.66. However, it reported revenue of $1.21 billion, exceeding analyst projections of $1.15 billion.
Comparable restaurant sales saw a 13.5% YoY increase, with Chili's and Maggiano's Little Italy, both subsidiaries of Brinker, experiencing a rise of 14.8% and 2.5% respectively. This was partially attributed to the successful launch of Chili's "Big Smasher" burger and value-focused advertising campaigns.
Brinker International's CEO, Kevin Hochman, stated that the company had made solid progress towards its goal of delivering profitable, sustainable growth. Looking ahead, the company has provided an optimistic forecast for fiscal 2025, predicting an EPS of $4.35-$4.75 and revenue of $4.55-4.62 billion, both figures surpassing the current consensus estimates.
InvestingPro Insights
As Brinker International (NYSE:EAT) navigates the challenges of balancing strong sales with bottom-line growth, the latest data from InvestingPro provides a mixed picture that investors may find useful. With a current market capitalization of $3.13 billion, the company is trading at a P/E ratio of 20.34. Interestingly, this is relatively low compared to near-term earnings growth, suggesting that the stock may be undervalued based on its earnings potential, an InvestingPro Tip that aligns with the company's recent robust sales performance.
Another InvestingPro Tip highlights that Brinker International has experienced significant returns over the last week, with a 14.01% price total return, contributing to a remarkable 91.77% return over the past year. This could reflect investor optimism about the company's profitability, as analysts predict Brinker will be profitable this year, a sentiment supported by the company's profitability over the last twelve months.
However, investors should also consider that the company's short-term obligations exceed its liquid assets, which may raise concerns about its financial flexibility. Moreover, the stock price has been quite volatile, which could indicate higher risk for potential investors. For those interested in a deeper dive into Brinker International's financials, InvestingPro offers additional tips that can be accessed through their platform.
Overall, the insights from InvestingPro suggest that while Brinker International has shown strong sales growth and potential undervaluation based on earnings, investors should weigh these positives against the company's financial health and stock volatility. With a total of 11 additional InvestingPro Tips available, investors have ample resources to make an informed decision about their investment in Brinker International.
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