Brinker International, Inc. EAT 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. However, increased expenses and slowdown in some of the major emerging markets remain potent headwinds.
Let us find out the reasons why investors should hold Brinker at the moment.
Sales-Building Initiatives & Expansion Encourage
Brinker is one of the few fast-casual restaurant chains that have been expanding despite a sluggish economic development. Though it is experiencing some headwinds in the Middle East, the company’s Latin America business has been solid. Notably, it is on the lookout to expand its brand in existing markets and enter new ones. In fiscal 2018, the company opened 34 restaurants. In fiscal 2019, it expects to open 34-40 restaurants globally, which will include new markets like Asia, with focus on China and Vietnam.
Meanwhile, over the past few quarters, Brinker’s remodeling efforts have gained momentum, leading to improvement in sales. It continues to invest in a brand-wide reimage program that will drive traffic and comps over the next three years. The company’s remodeling initiative is thus expected to continue to invigorate its potential as a brand and augment guests’ experience.
With menu innovation in focus, Brinker has been focusing on improving its Chili’s brand. In the trailing four quarters, Chili’s turn-around strategies paid off, with traffic and sales moving in the positive direction. Chili’s comps and traffic increased 2.9% and 3%, respectively, in third-quarter fiscal 2019. The company said that the positive momentum is likely to continue in fourth-quarter fiscal 2019 as well.
Brinker particularly is focusing on simplifying Chili’s core menu by improving recipes and strengthening value proposition, with some higher-quality ingredients and new cooking techniques to deliver better food at even more compelling price points. In fact, the early momentum, resulting from the menu launch, has been positive and serves as the fundamental move in the process of growing traffic at Chili's. In addition, 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.
Apart from higher labor costs, Brinker is shouldering increased expenses from sales-building efforts. In the third quarter, total operating costs and expenses increased roughly 4% to nearly $769.1 million compared with $739.8 million in the year-ago quarter. Additionally, advertising expenses, along with commodity inflation, are expected to continue hurting margins. Thus, the company’s profits in the upcoming quarters might remain under pressure despite its cost-saving initiatives.
In fact, Brinker earlier said that it expects restaurant operating margin to contract 160-180 basis points in fiscal 2019 as it invests specifically in its core food equities. Restaurant operating margin, as a percentage of sales for the company, was 14.3% compared with 16.1% in the prior-year quarter.
Also, 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. For instance, the company’s business in the Middle East is widely challenged, given the adverse economic factors impacting the region. In third-quarter fiscal 2019, it reported dismal international franchise comparable sales at Chili's restaurants.
Share Price Performance
Brinker, which shares the same space with Darden DRI, Cheesecake Factory CAKE and Chipotle CMG, presently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Higher costs and a lower return on equity (ROE) has led Brinker’s shares to decline over the past year. The company’s shares lost 4.6% against the industry’s growth of 24.4%. Also, Brinker’s ROE of negative 19.1% compares unfavorably with ROE of 6.5% for the industry, reflecting the fact that it is less efficient in using shareholders’ funds.
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