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Brinker (EAT) Poised for Long-Term Growth, Risks Prevail

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On Dec 29, we issued an updated research report on Brinker International, Inc.EAT .

The company primarily owns, operates, develops and franchises various restaurants under Chili's Grill & Bar (Chili's) and Maggiano's Little Italy (Maggiano's) brands.

Prospects

Brinker's shares have outperformed the broader Zacks categorized Retail-Restaurants industry over the past six months. While the stock jumped nearly 9%, the broader industry gained 1.7% during the same time period. Given the sales-building initiatives and accelerated share repurchase program, the stock should keep performing well in the quarters ahead.

Notably, Brinker remains steadfast in its goal to drive traffic and revenues through a range of sales-building initiatives such as menu innovation, better food presentation, promotional offerings, advertising campaigns, kitchen system optimization, and introduction of loyalty program and better service platform. Additionally, it is investing heavily in technology-driven initiatives, like online ordering, to augment sales and boost guest services.

In Sep 2016, Brinker announced that it has entered into a $300 million worth accelerated share repurchase agreement with Bank of America. This reflects the Texas-based restaurant chain's sound financial position and favorable prospects.

In Jun 2015, Brinker acquired 103 franchised Chili's Grill and Bar restaurants from Pepper Dining Holding Corp. for $106.5 million. We note that, unlike most of its peers, it is focused on company-owned restaurants, which allows Brinker to have full control over operations and also keep the profits.

Hence, the Pepper Dining deal turned out to be positive in an industry that depends largely on franchising. Thus, the units should continue to drive the company's top-line and bottom-line performance, moving ahead.

Brinker's remodeling initiative is expected to continue to invigorate its potential as a brand and enhance guests' experience. Particularly, the company's Chili's Bar initiative is slated to drive future growth as it continues to evaluate additional enhancements to its bar business to make the experience more compelling for its target consumers. On the other hand, Maggiano's banquet business is also expected to drive the company's performance in the upcoming quarters.

Challenges

However, Brinker's revenues have missed the Zacks Consensus Estimate in six of the trailing seven quarters, mainly due to lower comps. Notably, traffic decline at its restaurants has been hurting the comps. The company's high exposure in states like Texas, Louisiana and Oklahoma, where the economy is currently sluggish due to the continuous decline in oil prices , would continue to hurt traffic.

Additionally, 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. Further, higher labor and costs related to various initiatives might continue to hurt margins while a soft consumer spending environment in the U.S. restaurant space might limit revenue growth.

Zacks Rank & Stocks to Consider

Brinker currently has a Zacks Rank #3 (Hold). Better-ranked stocks in this sector include Wingstop Inc. WING , Papa John's International Inc. PZZA , and The Wendy's Company WEN . While Wingstop sports a Zacks Rank #1 (Strong Buy), Papa John's and Wendy's carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

The Zacks Consensus Estimate for Wingstop's 2016 earnings climbed 1.8% over the last 60 days. The company's earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 11.99%.

The Zacks Consensus Estimate for Papa John's 2016 earnings moved up 2.4% over the last 60 days. Meanwhile, for the full year, EPS is expected to improve 19.9%.

Wendy's earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 28.38%. Further, for 2016, EPS is expected to grow 23.9%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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