Here's Why You Should Retain Brinker (EAT) in Your Portfolio
Brinker International, Inc. EAT is poised to benefit from solid Chili's performance, improved value propositions and advertising campaigns. This and the focus on Core Four improvements bode well. However, increased operating expenses are a concern.
Let us discuss the factors that highlight why investors should retain the stock for the time being.
Factors Driving Growth
Chili's has been a major growth driver for the company. Chili’s turn-around strategies generated positive results, with traffic and sales moving in a positive direction. These strategies are focused on simplifying Chili’s core menu by improving recipes, strengthening the value proposition with higher-quality ingredients and incorporating new cooking techniques to deliver better food at more compelling prices.
During the first quarter of fiscal 2024, Chili’s revenues increased 6.8% year over year to $908.1 million. The upside was primarily backed by increased menu pricing and a favorable menu item mix. During the quarter, domestic comps at Chili’s (including company-owned and franchised) rose 6% year over year. The company emphasizes the brand's new restaurant development to drive growth. Chili’s has 11-12 new domestic openings and 19-24 new international openings scheduled in the pipeline for the fiscal 2024. The company is optimistic about its growth plans for Chili's through the fiscal 2024 and expects to consistently outperform the industry in terms of sales.
The company initiated a strategic decision, considering the outcomes of the advertising campaign and the establishment of a stronger base business. It will integrate an additional four weeks of advertising (during the third quarter), expanding the weeks on air from 21 to 25 in fiscal 2024. This tactical move is aimed to propel sales and traffic growth throughout the fiscal year. The commercial plan, combined with continuous efforts to streamline operations, is expected to expedite positive business outcomes.
Increasing focus on menu innovation bodes well. The recent menu updates, particularly the Chicken Crisper relaunch and the introduction of the National Hot Crisper have proven successful for the company. After being in the market for over a quarter, the new lineup has demonstrated improved performance. Strategies such as recipe simplification, selling larger piece counts, and pricing adjustments, coupled with enhanced sauce and side innovations, have enabled the average Crisper food cost (as a percentage of sales) to decline from 23% to 20%. Consequently, sales of Crispers have increased 40%, contributing to a larger business with reduced food costs and improved profit margins. These menu innovations have played a pivotal role in the company's enhanced financial performance in the quarter.
Additionally, the new bar menu introduced in late August, featuring premium margaritas and the It's Just Wings brand, has shown promising early results. The fresh premium margaritas have garnered interest, prompting guests to shift from the 3 for Me option to full-priced wings and crispers. This shift positively impacted sales and margins. The company is optimistic regarding the next phase of Core Four improvements and anticipates it to be a driving factor.
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Shares of Brinker have gained 16.4% in the past three months compared with the industry’s 9.3% growth.
Concerns
The company has been continuously shouldering increased expenses, which are detrimental to margins. Brinker is encountering higher repairs and maintenance expenses and an increase in utility expenses.
During the first quarter of fiscal 2024, total operating costs and expenses were $988.3 million, up from $975.3 million reported in the year-ago quarter. Restaurant labor costs during the quarter came in at $348.1 million compared with $330.6 million reported in the year-ago quarter. The company is cautious about the uncertain macro environment and inflationary pressures.
Zacks Rank & Key Picks
Brinker currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Retail-Wholesale sector are:
Arcos Dorados Holdings Inc. ARCO sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 28.3% on average. Shares of ARCO have surged 40.3% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for ARCO’s 2024 sales and earnings per share (EPS) indicates 10.6% and 15.5% growth, respectively, from the year-ago period’s levels.
Chipotle Mexican Grill, Inc. CMG carries a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 5.8%, on average. Shares of CMG have increased 53.6% in the past year.
The Zacks Consensus Estimate for CMG’s 2024 sales and EPS indicates 13.1% and 18.9% growth, respectively, from the year-ago period’s levels.
Darden Restaurants, Inc. DRI carries a Zacks Rank #2. It has a trailing four-quarter earnings surprise of 4.2%, on average. The stock has gained 8.4% in the past year.
The Zacks Consensus Estimate for DRI’s 2024 sales and EPS suggests rises of 9.9% and 10.9%, respectively, from the year-ago period’s levels.
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Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
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Brinker International, Inc. (EAT) : Free Stock Analysis Report
Arcos Dorados Holdings Inc. (ARCO) : Free Stock Analysis Report
