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Brinker (EAT) Poised for Long-Term Growth Despite Challenges

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On May 9, we issued an updated research report on Brinker International, Inc. (EAT - Free Report) . 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.

Brinker posted mixed third-quarter fiscal 2017 results on Apr 25 wherein earnings beat the Zacks Consensus Estimate, while revenues lagged the same.

Though the company has solid long-term growth potential but the risks from near-term headwinds might restrict its growth momentum.

Prospects

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

Notably, in second-quarter fiscal 2016, the company started a strategic plan — Vision 2020 — focusing on menu innovation in Chili's, continued improvement in service and ambiance to differentiate the brand and gain market traction for long-term earnings per share growth of 10–15%.

Additionally, at Maggiano's, the company is poised to continue delivering differentiated dining experience with the rollout of a new menu. The new menu expands dining options to drive incremental visits and includes a brunch offering. Since its launch in early March, management has noted improved momentum in sales and guest satisfaction, especially with weekend brunch.

Moreover, we expect Brinker’s remodeling initiative to continue invigorating 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 for making the experience more compelling for its target consumers.

Meanwhile, unlike most of its peers, Brinker is focused on company-owned restaurants, which allows it to have full control over operations and also keep the profits.

Challenges

However, Brinker’s shares have underperformed the broader Zacks categorized Retail-Restaurants industry over the past six months. While the industry gained 14%, the stock witnessed a loss of 17.4% during the same time period. Going forward, a soft consumer spending environment in the U.S. restaurant space and a rising costs scenario could weigh on the company’s performance, thereby reflecting on its share price.



Moreover, the company’s revenues missed the Zacks Consensus Estimate in eight of the trailing nine 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 volatility in the energy sector, would continue to hurt traffic.

Furthermore, based on lower-than-expected category sales in the first half of fiscal 2017 and projected decline in the category trends in the near term, the company expects full-year comps to decline in the range of 1.5–2%. 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.

Zacks Rank & Stocks to Consider

Brinker currently has a Zacks Rank #3 (Hold). Better-ranked stocks in this sector include Restaurant Brands International Inc. (QSR - Free Report) , Darden Restaurants, Inc. (DRI - Free Report) and Yum China Holdings, Inc. (YUMC - Free Report) . While Restaurant Brands sports a Zacks Rank #1 (Strong Buy), Darden and Yum China carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Restaurant Brands’ earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat of 7.41%. Meanwhile, for 2017, EPS is expected to grow a solid 20%.

The Zacks Consensus Estimate for Darden’s fiscal 2017 earnings climbed 1.5%, 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 3.35%.

The Zacks Consensus Estimate for Yum China’s 2017 earnings climbed 4.4% over the past 60 days. Moreover, for 2017, EPS is expected to improve 10.7%.

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