We are reverting our recommendation on the restaurateur,
Brinker International Inc.
), to Neutral from Outperform owing to soft revenues and comps in
fourth-quarter fiscal 2013.
Why the Downgrade?
Although Brinker's fourth-quarter fiscal 2013 earnings beat
the Zacks Consensus Estimate by 4.05%, its revenues missed the
same by nearly 0.7%. Quarterly revenues also remained nearly flat
year over year due to negative comps. Brinker's comps have lost
momentum in the last two quarters, decreasing 0.9% and 0.5% in
the third and fourth quarters, respectively, owing to lower
traffic and frail industry sales. Although the company has taken
a set of initiatives to boost its comps, a muted comps guidance
of 1%-2% for fiscal 2014 remains a concern.
Another headwind for Brinker is higher commodity costs, which
may hurt its profitability in the ensuing quarters. Moreover,
several issues like the Affordable Care Act and costs related to
the implementation of the company's sales-building initiatives
are expected to limit margins, going ahead.
Apart from this, a limited consumer spending environment has
also added to the woes. Government budget cuts, higher tax rates
and still-tightened credit availability continue to hurt consumer
discretionary spending. In the U.S., though some signs of modest
economic recovery and improving consumer confidence can be seen,
it is still uncertain. Additionally, stiff competition resulting
in higher discounting rates remains another cause of
However, some positive attributes prevent us from being too
pessimistic on the stock. Despite macroeconomic volatility, the
Zacks Rank #3 (Hold) company has reported year-over-year growth
in profitability for the past 12 quarters, driven by its
cost-saving efforts. Moreover, the company through its "Plan to
Win" initiative continues to focus on augmenting its sales,
earnings, profitability and return to shareholders. Moreover,
Brinker is on its way to reach its earnings per share target of
$4.00 by fiscal 2017 by growing its earnings by 10%-15%
The company's sales-driving initiatives, aggressive expansion
efforts, remodeling initiatives and closing of underperforming
assets should prove beneficial over the long term.
Other Stocks to Consider
Others players in the same industry, which look attractive at
current levels, include
AFC Enterprises Inc.
Domino's Pizza, Inc.
CEC Entertainment Inc.
). All these stocks carry a Zacks Rank #2 (Buy).
AFC ENTERPRISES (AFCE): Free Stock Analysis
CEC ENTERTANMNT (CEC): Free Stock Analysis
DOMINOS PIZZA (DPZ): Free Stock Analysis
BRINKER INTL (EAT): Free Stock Analysis
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