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Solid Chili's Performance Aid Brinker (EAT), High Costs Ail
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Brinker International, Inc. (EAT - Free Report) is poised to benefit from solid Chili's performance, sales-building initiatives and reimage program. This along with a focus on expansion efforts bodes well. However, a decline in traffic from pre-pandemic levels and a rise in food and labor costs are a concern.
Let us discuss the factors that highlight why investors should retain the stock for the time being.
Factors Driving Growth
Chili's has been a major growth driver for the company. Chili’s turn-around strategies generated positive results, with traffic and sales moving in the positive direction. These strategies are focused on simplifying Chili’s core menu by improving recipes, strengthening value proposition with higher-quality ingredients and incorporating new cooking techniques to deliver better food at more compelling prices. During first-quarter fiscal 2022, comps at Chili's franchised restaurants increased 14.7%. The upside can be attributed to an increase in dining room sales and traffic at the company’s franchise restaurants. Comps at Chili's franchised restaurants increased 23.1% against a decline of 11.5% in the year-ago quarter. At international franchised Chili’s restaurants, the same surged 32% versus the year-ago quarter’s decline of 21.9%. In the U.S. franchised units, comps climbed 17.8% against the year-ago quarter’s slump of 5.6%.
Brinker is steadfast in its goal to drive traffic and revenues through a range of sales-building initiatives such as streamlining of the menu and its innovation, strengthening its value proposition, better food presentation, advertising campaigns, kitchen system optimization and the introduction of a better service platform. During fiscal 2021, the company implemented technology enhancements to curbside its takeout system. The initiative is already simplifying the operational side of the business and improving guest metrics. During the fiscal year, Just Wings went live with a website that offers online ordering for takeout and delivery. These initiatives will likely contribute to Brinker’s business in the near future.
Focus on the reimage program bodes well. Brinker’s remodeling initiative is expected to continue boosting its potential as a brand and augment guest experiences that is likely to drive traffic and comps over the next three years. The company is positioned to invest aggressively to grow its business in fiscal 2022 and beyond. For the coming year, Brinker’s will look for more ways to offer convenience, value and a great guest experience by doubling its pipeline of new restaurant openings and expanding its portfolio of brands.
Brinker is one of the few fast-casual restaurant chains that have been expanding despite sluggish economic development. In fiscal 2018, 2019 and 2020, the company opened 34, 23 and 31 restaurants, respectively, globally. During fiscal 2021, the company opened 18 new restaurants, including eight company-owned, 10 total franchises. In fiscal 2021, the company also opened restaurants in six new locations and entered into two new arrangements — one with an existing franchise partner and the other with a new franchise partner. In first-quarter fiscal 2022, the company opened 4 restaurants. In fiscal 2022, the company anticipates opening 20-23 restaurants.
Concerns
Image Source: Zacks Investment Research
Shares of Brinker have declined 34.3% so far this year against the industry’s growth of 13.1%. The dismal performance was primarily caused by the coronavirus pandemic. Although the majority of dining services are open, traffic is low compared with pre-pandemic levels. Going forward, the company intends to monitor the situation on a regular basis to gauge the impacts of COVID-19.
The company has been continuously shouldering increased expenses, which are detrimental to margins. A rise in restaurant labor costs, which include wage rates, training and overtime, continues to hurt the company. Brinker is encountering higher repairs and maintenance expenses as well as an increase in utility expenses. During the fiscal first quarter, total operating costs and expenses increased to $850.8 million from $715.7 million in the year-ago quarter. Restaurant operating margin — as a percentage of company sales — was 10.4% compared with 11.6% in the prior-year quarter. Uncertainty due to the pandemic resulted in labor and supply chain disruptions. The company’s margin in second-quarter fiscal 2022 is likely to be impacted by higher food and beverage and labor costs.
Some better-ranked stocks in the same space include Papa John's International, Inc. (PZZA - Free Report) , Arcos Dorados Holdings Inc. (ARCO - Free Report) and McDonald's Corporation (MCD - Free Report) .
Papa John's currently carries a Zacks Rank #2 (Buy). The company benefits from its off-premise business model. Sales at off-premise business model have exceeded pre-pandemic levels. We believe that a boost in customer count coupled with targeted off-premise marketing is likely to drive the channel’s performance in the upcoming periods.
Papa John's reported better-than-expected earnings in three of the trailing four quarters, the average surprise being 27.2%. The company’s fiscal 2021 earnings is likely to witness growth of 142.1%. PZZA stock has gained 58.6% in the past year.
Arcos Dorados carries a Zacks Rank #2. ARCO has a long-term earnings growth of 42.9%. Shares of the company have increased 11.7% so far this year.
The Zacks Consensus Estimate for Arcos Dorados current financial year sales and EPS suggests growth of 31% and 112.5%, respectively, from the year-ago period’s levels.
McDonald’s carries a Zacks Rank #2. A robust drive-thru presence and investments in delivery and digitization in the past few years have helped the company to tide over the pandemic. The company has a trailing four-quarter earnings surprise of 6.8%, on average.
The Zacks Consensus Estimate for McDonald's current financial year sales and EPS suggests growth of 20.9% and 55.7%, respectively, from the year-ago period’s levels. MCD has rallied 26.6% in the past year.
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Solid Chili's Performance Aid Brinker (EAT), High Costs Ail
Brinker International, Inc. (EAT - Free Report) is poised to benefit from solid Chili's performance, sales-building initiatives and reimage program. This along with a focus on expansion efforts bodes well. However, a decline in traffic from pre-pandemic levels and a rise in food and labor costs are a concern.
Let us discuss the factors that highlight why investors should retain the stock for the time being.
Factors Driving Growth
Chili's has been a major growth driver for the company. Chili’s turn-around strategies generated positive results, with traffic and sales moving in the positive direction. These strategies are focused on simplifying Chili’s core menu by improving recipes, strengthening value proposition with higher-quality ingredients and incorporating new cooking techniques to deliver better food at more compelling prices. During first-quarter fiscal 2022, comps at Chili's franchised restaurants increased 14.7%. The upside can be attributed to an increase in dining room sales and traffic at the company’s franchise restaurants. Comps at Chili's franchised restaurants increased 23.1% against a decline of 11.5% in the year-ago quarter. At international franchised Chili’s restaurants, the same surged 32% versus the year-ago quarter’s decline of 21.9%. In the U.S. franchised units, comps climbed 17.8% against the year-ago quarter’s slump of 5.6%.
Brinker is steadfast in its goal to drive traffic and revenues through a range of sales-building initiatives such as streamlining of the menu and its innovation, strengthening its value proposition, better food presentation, advertising campaigns, kitchen system optimization and the introduction of a better service platform. During fiscal 2021, the company implemented technology enhancements to curbside its takeout system. The initiative is already simplifying the operational side of the business and improving guest metrics. During the fiscal year, Just Wings went live with a website that offers online ordering for takeout and delivery. These initiatives will likely contribute to Brinker’s business in the near future.
Focus on the reimage program bodes well. Brinker’s remodeling initiative is expected to continue boosting its potential as a brand and augment guest experiences that is likely to drive traffic and comps over the next three years. The company is positioned to invest aggressively to grow its business in fiscal 2022 and beyond. For the coming year, Brinker’s will look for more ways to offer convenience, value and a great guest experience by doubling its pipeline of new restaurant openings and expanding its portfolio of brands.
Brinker is one of the few fast-casual restaurant chains that have been expanding despite sluggish economic development. In fiscal 2018, 2019 and 2020, the company opened 34, 23 and 31 restaurants, respectively, globally. During fiscal 2021, the company opened 18 new restaurants, including eight company-owned, 10 total franchises. In fiscal 2021, the company also opened restaurants in six new locations and entered into two new arrangements — one with an existing franchise partner and the other with a new franchise partner. In first-quarter fiscal 2022, the company opened 4 restaurants. In fiscal 2022, the company anticipates opening 20-23 restaurants.
Concerns
Shares of Brinker have declined 34.3% so far this year against the industry’s growth of 13.1%. The dismal performance was primarily caused by the coronavirus pandemic. Although the majority of dining services are open, traffic is low compared with pre-pandemic levels. Going forward, the company intends to monitor the situation on a regular basis to gauge the impacts of COVID-19.
The company has been continuously shouldering increased expenses, which are detrimental to margins. A rise in restaurant labor costs, which include wage rates, training and overtime, continues to hurt the company. Brinker is encountering higher repairs and maintenance expenses as well as an increase in utility expenses. During the fiscal first quarter, total operating costs and expenses increased to $850.8 million from $715.7 million in the year-ago quarter. Restaurant operating margin — as a percentage of company sales — was 10.4% compared with 11.6% in the prior-year quarter. Uncertainty due to the pandemic resulted in labor and supply chain disruptions. The company’s margin in second-quarter fiscal 2022 is likely to be impacted by higher food and beverage and labor costs.
Zacks Rank & Key Picks
Brinker currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the same space include Papa John's International, Inc. (PZZA - Free Report) , Arcos Dorados Holdings Inc. (ARCO - Free Report) and McDonald's Corporation (MCD - Free Report) .
Papa John's currently carries a Zacks Rank #2 (Buy). The company benefits from its off-premise business model. Sales at off-premise business model have exceeded pre-pandemic levels. We believe that a boost in customer count coupled with targeted off-premise marketing is likely to drive the channel’s performance in the upcoming periods.
Papa John's reported better-than-expected earnings in three of the trailing four quarters, the average surprise being 27.2%. The company’s fiscal 2021 earnings is likely to witness growth of 142.1%. PZZA stock has gained 58.6% in the past year.
Arcos Dorados carries a Zacks Rank #2. ARCO has a long-term earnings growth of 42.9%. Shares of the company have increased 11.7% so far this year.
The Zacks Consensus Estimate for Arcos Dorados current financial year sales and EPS suggests growth of 31% and 112.5%, respectively, from the year-ago period’s levels.
McDonald’s carries a Zacks Rank #2. A robust drive-thru presence and investments in delivery and digitization in the past few years have helped the company to tide over the pandemic. The company has a trailing four-quarter earnings surprise of 6.8%, on average.
The Zacks Consensus Estimate for McDonald's current financial year sales and EPS suggests growth of 20.9% and 55.7%, respectively, from the year-ago period’s levels. MCD has rallied 26.6% in the past year.