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Brinker (EAT) Prospects Bright Despite Macroeconomic Woes

Zacks

On Sep 19, we issued an updated research report on Brinker International, Inc. EAT.

Based in Dallas, TX, 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.

Prospects

The acquisition of 103 franchised Chili’s Grill and Bar restaurants from Pepper Dining Holding Corp. for $106.5 million in Jun 2015 boosted the company’s fourth-quarter fiscal 2016 results.

Notably, unlike most of its peers, Brinker is focused on company-owned restaurants, which allows it to have full control over operations and also keep the profits. Hence, the Pepper Dining deal turned out to be positive in an industry that depends largely on franchising and the units should thus continue to drive the company’s top and bottom line performance, moving ahead.

Meanwhile, the company initiated a strategic plan — Vision 2020 — in second-quarter fiscal 2016. It focuses on menu innovation in Chili's and continuous improvement in service to differentiate the brand and gain market traction to achieve the long-term earnings growth target of 10% to 15%.

Moreover, the company’s aggressive expansion strategies and sales building initiatives, such as introduction of loyalty program along with promotional offerings, should boost comps. Also, Brinker’s remodeling initiative is expected to continue to invigorate its potential as a brand and enhance guests’ experience.

Additionally, Brinker is investing heavily in technology-driven initiatives, like online ordering, to augment sales and boost guest services.

Challenges

However, Brinker’s revenues have missed the Zacks Consensus Estimate in five of the trailing six quarters, mainly due to lower comps. Notably, traffic decline at its restaurants has been hurting the comps. Moreover, the company’s high exposure in states like Texas, Louisiana and Oklahoma, where the economy is currently sluggish due to the continuous decline in oil prices, would continue to hurt traffic.

Additionally, Brinker’s international comps might be under pressure in the coming quarters due to a slowdown in some of the international markets that it operates in. Further, higher labor and costs related to various initiatives might continue to hurt margins in the near term.

Zacks Rank & Stocks to Consider

Brinker currently has a Zacks Rank #3 (Hold). Better-ranked stocks in this sector include Papa John's International Inc. PZZA, Del Taco Restaurants, Inc. TACO and Wingstop Inc. WING. 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.

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