We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Brinker Stock Rises 21% in a Month: Is it Time to Buy or Hold?
Read MoreHide Full Article
Brinker International, Inc. (EAT - Free Report) has been on a roll lately, with the stock appreciating 20.5% in the past month compared with the Zacks Retail – Restaurants industry’s 10.4% rise. The past month’s stellar price performance puts EAT ahead of competitors like McDonald's Corporation (MCD - Free Report) , Chipotle Mexican Grill, Inc. (CMG - Free Report) and Yum! Brands, Inc. (YUM - Free Report) .
Brinker is riding on several strategic initiatives. The company's solid performance of Chili's, increased menu pricing and higher traffic have played pivotal roles in this upward trend. The overall recovery in the restaurant industry is providing a favorable backdrop. In July, restaurant sales climbed 0.4% from June and 3.4% year over year to $97.01 billion, reflecting consumer confidence amid easing inflation.
Image Source: Zacks Investment Research
Technical indicators are supportive of Brinker's strong performance. As of Tuesday, the stock was trading at $71.2, above its 50-day moving average of $67.5 and the 200-day moving average of $53.4. This technical strength reflects positive market perception and confidence in EAT's financial health and prospects.
Image Source: Zacks Investment Research
With the stock on such a hot streak, should you dive in now or hold off for a better entry point? Let us break it down.
What’s Fueling Brinker's Rise?
Solid Turnaround Strategy Yielding Results: Fiscal 2024 marked the second full year of Brinker's turnaround strategy, focusing on enhancing the core fundamentals of its restaurants. The company’s vision centers around improving 4-wall economics by refining the guest experience and optimizing operational efficiencies. This approach has already borne fruit, with Chili’s restaurant average unit volumes growing $0.44 million to $3.6 million and Brinker's adjusted EBITDA increasing 25% over the past two fiscal years.
Enhancing Guest Experience Through Operational Simplification: EAT has made significant efforts to simplify operations and improve the guest experience. By reducing Chili's menu by 22% and streamlining kitchen processes, the company has created a more efficient operating environment that enhances team member morale and reduces complexity. Investments in technology, such as the introduction of Ziosk pay-at-the-table technology and AI-driven labor forecasting, have improved operational efficiency, resulting in a decline in server ordering errors and increased overall reliability.
Strategic Marketing & Menu Innovations: Brinker has also focused on menu innovation and strategic marketing to drive traffic and sales. The company has revamped its core offerings, including the introduction of the Big Smasher burger and a lineup of premium margaritas. Successful marketing campaigns, such as the "Better Value Than Fast Food" campaign, have resonated well with consumers, leading to a 14.8% year-over-year increase in Chili's comps and 5.9% growth in traffic in the fourth quarter of fiscal 2024. Additionally, the company has re-engaged in targeted advertising across various channels, which has helped Chili's regain cultural relevance and consumer consideration.
Positive Outlook for FY25: EAT has outlined a robust plan for fiscal 2025, focusing on further operational simplification, enhancing its core menu offerings and leveraging technology to improve efficiency. The company plans to continue its successful barbell pricing strategy, balancing affordable and premium options to cater to a wide range of customers. These initiatives, along with targeted investments in labor and marketing, are designed to drive sustainable traffic growth and further improve unit economics.
The company will continue to focus on driving traffic through value offerings, such as the successful Big Smasher campaign, and plans to refresh its $10.99 value platform with product innovations. A significant relaunch of its fajitas platform, which currently represents a $200-million business, is planned for the fourth quarter of fiscal 2025.
Potential Roadblocks for Brinker
Declining Traffic at Maggiano’s: While Chili’s reported a 5.9% year-over-year increase in traffic in the fiscal fourth quarter, Maggiano’s faced a significant challenge with an 8.9% drop in traffic. Despite efforts to apply lessons from Chili’s turnaround to Maggiano’s, the brand continues to struggle. The decline in customer visits raises concerns about the long-term sustainability of growth at Maggiano’s, which could weigh down Brinker's overall performance.
High Dependency on Price Increases: A significant portion of Brinker's recent growth has been driven by price increases, particularly at Chili’s, wherein 8.1% of sales growth was attributed to higher prices. While this has bolstered short-term revenues, relying heavily on price hikes can be risky in the long run. As consumer sensitivity to price changes increases, especially in a competitive casual dining market, Brinker may find it challenging to maintain growth without alienating customers.
Pressures From Commodity Inflation & Wage Increases: Despite favorable year-over-year comparisons in food and beverage costs, Brinker is not immune to the broader industry pressures of commodity inflation and wage increases. Labor expenses, although more favorable than the prior year, are subject to inflationary pressures. With wage rate inflation at 3.5%, the company is prone to margin compression if these trends continue, especially as it plans further investments in labor to drive traffic growth.
Strategic Shifts & Investments Pose Risks: EAT’s aggressive investments in technology, labor and facilities have been pivotal in driving operational improvements and guest experience. However, these investments come with significant costs. For instance, the company’s capital expenditure for the full year reached $199 million on equipment replacements, restaurant development, IT upgrades and restaurant reimaging. While these investments are necessary for modernization, they also increase the financial burden on the company, affecting its ability to generate consistent returns for shareholders.
EAT’s Valuation & Earnings Prospects
Brinker is trading at a discount to the industry. With a forward 12-month price-to-earnings of 15.07X, which is well below the industry average of 23.96X, the stock presents a potentially attractive valuation for investors.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for the company’s 2024 earnings per share (EPS) increased from $4.49 to $4.64 in the past 60 days. During the same period, the consensus mark for 2025 EPS has moved up from $4.96 to $5.12.
Image Source: Zacks Investment Research
Final Takeaway: Hold for Now — Watch for Further Gains
With the stock trading above its key moving averages, Brinker’s turnaround appears promising, bolstered by impressive traffic growth at Chili's and a strong recovery in the restaurant industry. However, challenges persist, including declining traffic at Maggiano's and a reliance on price increases that may impact growth. Ongoing inflation and wage pressures could squeeze margins, while significant capital expenditure raises concerns about financial strain.
Given these mixed signals, maintaining a hold position is prudent for existing investors. New investors should monitor for shifts in the company’s brand performance and macroeconomic conditions before making a fresh entry into the stock.
Image: Bigstock
Brinker Stock Rises 21% in a Month: Is it Time to Buy or Hold?
Brinker International, Inc. (EAT - Free Report) has been on a roll lately, with the stock appreciating 20.5% in the past month compared with the Zacks Retail – Restaurants industry’s 10.4% rise. The past month’s stellar price performance puts EAT ahead of competitors like McDonald's Corporation (MCD - Free Report) , Chipotle Mexican Grill, Inc. (CMG - Free Report) and Yum! Brands, Inc. (YUM - Free Report) .
Brinker is riding on several strategic initiatives. The company's solid performance of Chili's, increased menu pricing and higher traffic have played pivotal roles in this upward trend. The overall recovery in the restaurant industry is providing a favorable backdrop. In July, restaurant sales climbed 0.4% from June and 3.4% year over year to $97.01 billion, reflecting consumer confidence amid easing inflation.
Image Source: Zacks Investment Research
Technical indicators are supportive of Brinker's strong performance. As of Tuesday, the stock was trading at $71.2, above its 50-day moving average of $67.5 and the 200-day moving average of $53.4. This technical strength reflects positive market perception and confidence in EAT's financial health and prospects.
Image Source: Zacks Investment Research
With the stock on such a hot streak, should you dive in now or hold off for a better entry point? Let us break it down.
What’s Fueling Brinker's Rise?
Solid Turnaround Strategy Yielding Results: Fiscal 2024 marked the second full year of Brinker's turnaround strategy, focusing on enhancing the core fundamentals of its restaurants. The company’s vision centers around improving 4-wall economics by refining the guest experience and optimizing operational efficiencies. This approach has already borne fruit, with Chili’s restaurant average unit volumes growing $0.44 million to $3.6 million and Brinker's adjusted EBITDA increasing 25% over the past two fiscal years.
Enhancing Guest Experience Through Operational Simplification: EAT has made significant efforts to simplify operations and improve the guest experience. By reducing Chili's menu by 22% and streamlining kitchen processes, the company has created a more efficient operating environment that enhances team member morale and reduces complexity. Investments in technology, such as the introduction of Ziosk pay-at-the-table technology and AI-driven labor forecasting, have improved operational efficiency, resulting in a decline in server ordering errors and increased overall reliability.
Strategic Marketing & Menu Innovations: Brinker has also focused on menu innovation and strategic marketing to drive traffic and sales. The company has revamped its core offerings, including the introduction of the Big Smasher burger and a lineup of premium margaritas. Successful marketing campaigns, such as the "Better Value Than Fast Food" campaign, have resonated well with consumers, leading to a 14.8% year-over-year increase in Chili's comps and 5.9% growth in traffic in the fourth quarter of fiscal 2024. Additionally, the company has re-engaged in targeted advertising across various channels, which has helped Chili's regain cultural relevance and consumer consideration.
Positive Outlook for FY25: EAT has outlined a robust plan for fiscal 2025, focusing on further operational simplification, enhancing its core menu offerings and leveraging technology to improve efficiency. The company plans to continue its successful barbell pricing strategy, balancing affordable and premium options to cater to a wide range of customers. These initiatives, along with targeted investments in labor and marketing, are designed to drive sustainable traffic growth and further improve unit economics.
The company will continue to focus on driving traffic through value offerings, such as the successful Big Smasher campaign, and plans to refresh its $10.99 value platform with product innovations. A significant relaunch of its fajitas platform, which currently represents a $200-million business, is planned for the fourth quarter of fiscal 2025.
Potential Roadblocks for Brinker
Declining Traffic at Maggiano’s: While Chili’s reported a 5.9% year-over-year increase in traffic in the fiscal fourth quarter, Maggiano’s faced a significant challenge with an 8.9% drop in traffic. Despite efforts to apply lessons from Chili’s turnaround to Maggiano’s, the brand continues to struggle. The decline in customer visits raises concerns about the long-term sustainability of growth at Maggiano’s, which could weigh down Brinker's overall performance.
High Dependency on Price Increases: A significant portion of Brinker's recent growth has been driven by price increases, particularly at Chili’s, wherein 8.1% of sales growth was attributed to higher prices. While this has bolstered short-term revenues, relying heavily on price hikes can be risky in the long run. As consumer sensitivity to price changes increases, especially in a competitive casual dining market, Brinker may find it challenging to maintain growth without alienating customers.
Pressures From Commodity Inflation & Wage Increases: Despite favorable year-over-year comparisons in food and beverage costs, Brinker is not immune to the broader industry pressures of commodity inflation and wage increases. Labor expenses, although more favorable than the prior year, are subject to inflationary pressures. With wage rate inflation at 3.5%, the company is prone to margin compression if these trends continue, especially as it plans further investments in labor to drive traffic growth.
Strategic Shifts & Investments Pose Risks: EAT’s aggressive investments in technology, labor and facilities have been pivotal in driving operational improvements and guest experience. However, these investments come with significant costs. For instance, the company’s capital expenditure for the full year reached $199 million on equipment replacements, restaurant development, IT upgrades and restaurant reimaging. While these investments are necessary for modernization, they also increase the financial burden on the company, affecting its ability to generate consistent returns for shareholders.
EAT’s Valuation & Earnings Prospects
Brinker is trading at a discount to the industry. With a forward 12-month price-to-earnings of 15.07X, which is well below the industry average of 23.96X, the stock presents a potentially attractive valuation for investors.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for the company’s 2024 earnings per share (EPS) increased from $4.49 to $4.64 in the past 60 days. During the same period, the consensus mark for 2025 EPS has moved up from $4.96 to $5.12.
Image Source: Zacks Investment Research
Final Takeaway: Hold for Now — Watch for Further Gains
With the stock trading above its key moving averages, Brinker’s turnaround appears promising, bolstered by impressive traffic growth at Chili's and a strong recovery in the restaurant industry. However, challenges persist, including declining traffic at Maggiano's and a reliance on price increases that may impact growth. Ongoing inflation and wage pressures could squeeze margins, while significant capital expenditure raises concerns about financial strain.
Given these mixed signals, maintaining a hold position is prudent for existing investors. New investors should monitor for shifts in the company’s brand performance and macroeconomic conditions before making a fresh entry into the stock.
EAT currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.