Can Brinker's Sales Building Efforts Bring Back Lost Sheen?

Brinker International, Inc.’s EAT robust earnings trend, sales building initiatives, consistent expansion and operational initiatives as well as remodeling initiative bode well. However, higher costs and declining comps at Chili’s franchised restaurants remains a concern. In the past three months, shares of Brinker have declined 10.7% against the industry’s 8.9% rally.

In the third quarter of fiscal 2019, comps at Chili's franchised restaurants decreased 0.2% compared with a 2.2% decline in the year-ago quarter and a 0.8% drop in the second quarter. At international franchised Chili’s restaurants, the same fell 3.9% compared with the second quarter’s decrease of 6.5% and the year-ago quarter’s decline of 0.2%. Meanwhile, at the domestic franchised units, comps increased 2% against the year-ago quarter’s decline of 3.3%. However, the figure gained 3.4% in the fiscal second quarter.

Higher labor costs due to increased wages are expected to persistently keep profits under pressure. 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, costs related to various sales-boosting initiatives including advertising expenses along with commodity inflation are expected to continue denting margins. Thus, the company’s profits in the upcoming quarters might remain under pressure despite its cost-saving initiatives. In fact, Brinker had earlier stated 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.

Is There Any Silver Lining?

Brinker is making efforts to streamline menus and innovations, strengthen its value proposition, better food presentation, boost campaigns, kitchen system optimization and introduce better service platform. Backed by these sales-building initiatives, the company remains steadfast in its goal to drive traffic and revenues.

Particularly emphasizing on menu innovation to propel revenues, Brinker initiated a strategic plan — Vision 2020 — to focus on menu innovation in Chili’s, continuous improvement in service and atmosphere to differentiate the brand, and gain market traction for achieving long-term earnings per share growth target of 10-15%.

Notably, this Zacks Rank #3 (Hold) company is one of the few fast-casual restaurant chains that have been expanding despite a sluggish economic development. Management is gearing up for international expansion as well, especially in the faster growing emerging markets. Though it is experiencing some headwinds in the Middle East, Brinker’s Latin American business has been quite successful.

Currently, the company is on the lookout to expand its brand in existing markets and enter new ones. In fiscal 2018, it had opened 34 restaurants. In fiscal 2019, Brinker expects to open 34-40 restaurants globally, which will include the new markets like Asia, with a focus on China and Vietnam.

Additionally, Brinker’s remodeling efforts have gained momentum leading to improvement in sales over the past few quarters.

In fact, Brinker is consistently investing in a brand-wide reimage program that will drive traffic and comps over the next three years. Brinker’s remodeling initiative is thus expected steadily invigorate its potential as a brand and augment guests’ experience.

Key Picks

Better-ranked stocks worth considering in the same space include Chipotle Mexican Grill, Inc. CMG, Noodles & Company NDLS and Papa John's International, Inc. PZZA, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chipotle Mexican Grill and Noodles & Company’s earnings in 2019 are likely to witness 43.6% and 700% growth, respectively.

Papa John's has an impressive long-term earnings growth rate of 12.5%.

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