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Brinker Reverted to Neutral

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We are reverting our recommendation on the restaurateur, Brinker International Inc. (EAT - Free Report) , 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 concern. 

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% annually. 

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. (DPZ - Free Report) and CEC Entertainment Inc. . All these stocks carry a Zacks Rank #2 (Buy).

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