Brinker (EAT) Stock Soars 44% in a Month: More Upside Left?
Brinker International, Inc.’s EAT sales building plus digital, operational and remodeling initiatives are encouraging. In the past month, the company’s shares have surged 43.9% compared with the industry’s rally of 11%. However, coronavirus pandemic is expected to materially affect the company's operating and financial results for fiscal 2020.
Let’s delve deeper.
Growth Catalysts
Brinker remains 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, better food presentation, advertising campaigns, kitchen system optimization and introduction of better service platform.
Chili’s’ turn-around strategies yielded positive results with traffic and sales moving in the upward direction. The company is focused on simplifying Chili’s’ core menu by improving recipes and solidifying value proposition with some higher-standard ingredients and novel culinary techniques to deliver better food at even more compelling price points. In fact, the early momentum resulting from the menu launch has been instrumental in driving the traffic at Chili's.
Brinker is also investing heavily in technology-driven initiatives like online ordering to augment sales and boost guest services. Having installed a tabletop technology at all its restaurants in partnership with Ziosk, the company now implemented handheld devices all across California. This, in turn, is accelerating efficiency and speed. During second-quarter fiscal 2020, the company replaced the existing tabletop system with a more sophisticated system to enhance the guest experience and the capabilities of the model.
Moreover, the company, currently carrying a Zacks Rank #3 (Hold), prudently uses social media platforms and email database to improve customer awareness as well as traffic. These initiatives will contribute significantly to Brinker’s business in the near future. Meanwhile, its To-Go platform has been the fastest growing segment. For instance at Chili's, Brinker’s To-Go business has been continuously gaining traction. In the first half of fiscal 2020, Maggiano’s started testing electronic check presenters that facilitate a pay-at-the-table option to provide convenience to the visiting guests as well as bolster digital guest engagement.
Concerns
Due to the coronavirus outbreak, the company suspended Chili's re-image program and delayed the construction of new restaurants. It also withdrew its quarterly cash dividend and all share-repurchase activity. Further, salaries of the executive committee saw a deduction of 50%. The company scrapped its 2020 guidance as well.
However, Brinker has a significant amount of debt, which deteriorated to $2.6 billion (as of Mar 25, 2020) from $2.5 billion on Dec 25, 2019. As a result, the company’s debt-to-capital of 127% is higher than its sub industry’s average of 124.1%. Notably, its “Times Interest Earned” ratio of 3.1 reflects a dip from 3.5 in the prior quarter. Moreover, the company ended the quarter with cash and cash equivalents of $167 million, which may not be enough to manage its heavy debt.
Stocks to Consider
Some better-ranked stocks in the same space are Domino's Pizza, Inc. DPZ, Wingstop Inc. WING and Yum China Holdings, Inc. YUMC, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Domino's Pizza, Wingstop and Yum China have an impressive long-term earnings growth rate of 12.8%, 11% and 9.5%, respectively.
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