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Brinker Rides on Menu Innovation & Franchising, Costs Rise

Zacks Equity Research
Brinker's (EAT) expansion plans, along with its sales building, digital, operational and remodeling initiatives, are encouraging. High costs of operations hurt the company's margins.

Brinker International, Inc. EAT continues to gain from expansion and sales-building initiatives. Moreover, increased investments in technology and continual focus on take-out businesses are driving the company’s top-line.

However, high costs associated with restaurant operations and slowdown in some of the major emerging markets remain potent headwinds.

Sales Building Initiatives — Major Growth Drivers

Brinker remains steadfast in its goal to drive traffic and revenues through a range of sales-building initiatives such as streamlining of menu, strengthening value proposition, better food presentation, advertising campaigns, kitchen system optimization and introduction of better service platform.

Particularly emphasizing on menu innovation to propel revenues, the company started a plan — Vision 2020 — in 2016, focusing on menu innovation in Chili's, continuous improvement in service, and atmosphere to differentiate the brand and gain market traction to achieve long-term earnings per share growth target of 10-15%.

Apart from menu innovation, the company’s remodeling efforts have gained momentum, leading to sales improvement. Moreover, in the first quarter of fiscal 2019, the company plans to invest in a brand-wide re-image program, which will drive traffic and comps over the next three years.Thus, Brinker’s remodeling initiative is expected to continue to invigorate its potential as a brand and augment guests’ experience.

Meanwhile, the company is also investing heavily in technology-driven initiatives, including online ordering, to augment sales and boost guest services.Having installed a table-top technology at all the company-owned restaurants in partnership with Ziosk, Brinker has now implemented handheld devices in all of California.

The To-Go platform has been the fastest growing segment of the company. Brinker’s To-Go business increased to roughly 12-13% of the total sales in the fiscal fourth quarter. In the reported quarter, the company delivered positive To-Go sales, driven by double-digit increases in online ordering.

Franchising to Aid Earnings Amid Competition

Unlike Mc Donald’s MCD, Domino’s DPZ and YUM! Brands YUM, Brinker used to focus on company-owned restaurants to gain full control over its operations and profits. However, to survive in an industry that depends largely on franchising, the company started to expand through franchisees and partnerships.

For instance, Brinker acquired 103 franchised Chili’s Grill and Bar restaurants from Pepper Dining Holding Corp. in fiscal 2015. Notably, in fiscal 2017, Brinker’s franchise operated locations increased 40%. Strong growth should continue to boost the company’s top and bottom lines. In fact, Brinker witnessed top-line improvement in fiscal 2018, driven by franchise and other revenues, which offset slow comps growth.

Concerns

Apart from high labor expenses, Brinker continues to shoulder costs related to various sales-boosting initiatives — including advertising expenses — along with commodity inflation. Despite robust cost-saving efforts, the company’s margins are expected to remain under pressure in the quarters ahead.

In fact, Brinker expects restaurant operating margin to be down 160-180 basis points in fiscal 2019 as it invests specifically in its core food equities.
Further, the company’s international comps might be under pressure in the coming quarters due to slowdown in some of the international markets, which it operates in. This might limit discretionary spending, in turn, hurting the company’s top line.

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