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Brinker (EAT) Strategic Plans Bode Well: Should You Hold?

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Shares of Brinker International, Inc. (EAT - Free Report) are riding high on aggressive expansion and sales-building initiatives, digital capabilities as well as remodeling efforts. Evidently, the stock has rallied 33.7% in a year, outperforming the industry’s 3.9% upside.

However, a slowdown in some of the key international markets and overall high costs associated with restaurant operations remain major concerns for the company. Let’s delve deeper.

Hidden Catalysts

Brinker remains steadfast in its goal to boost traffic and revenues through a range of sales-building initiatives like streamlining of menu and its innovation, strengthening its value proposition, better food presentation, advertising campaigns, kitchen system optimization and introduction of better service platform. In 2016, the company also initiated a strategic plan — Vision 2020 — to propel revenues.

Markedly, this plan focuses on menu innovation in Chili's, and consistent improvement in service and atmosphere to differentiate the brand and gain market traction for achieving long-term earnings per share growth target in the 10-15% range.

Furthermore, this Zacks Rank #3 (Hold) company is gearing up for international expansion, especially in faster growing emerging markets. Though it is experiencing some headwinds in the Middle East, Brinker’s Latin American business has been solid.

Additionally, the company is on the lookout to expand its brand in existing markets and enter new ones. In fiscal 2018, it expects to open 38 to 43 restaurants globally, which will include new markets like Panama, Chile and Vietnam.

Meanwhile, in third-quarter fiscal 2018, Brinker’s global business partners in Latin America and the Pacific witnessed positive comps, indicating strong demand for the brand worldwide. Currently, the company is under negotiation to expand its footprint in China.

Brinker is also investing heavily in technology-driven initiatives, like online ordering, to augment sales and boost guest services. This is because the digital wave has hit the U.S. fast-casual restaurant sector, with many restaurants deploying technology toward enhancing guest experience.

Having installed a table top technology at all the company-owned restaurants in partnership with Ziosk, Brinker has now implemented handheld devices across California. This, in turn, is resulting in increased efficiency and speed.

 

Concerns

Higher labor costs owing to increased wages and costs incurred due to the implementation of the Affordable Care Act are expected to continue weighing on profits. Moreover, the collapse of the Republican-led bill, which was intended to replace Obamacare, indicates that the Affordable Care Act is here to stay. This means that the restaurant operators will have to continue shouldering increased labor costs, which in turn will hurt margins.

Additionally, costs related to various sales-boosting initiatives including advertising expenses along with commodity inflation are expected to continue hurting margins. Thus, the company’s profits in the upcoming quarters might remain under pressure despite its cost-saving initiatives. In fiscal 2018, Brinker expects restaurant operating margin to be down 65-75 basis points as it invests specifically in its core food equities.

In the coming quarters, Brinker’s international comps are also likely to be affected by a slowdown in some of the markets that it operates in. Moreover, the company is highly exposed to threats from various emerging nations, which has been exhibiting decelerating growth for some time due to several macro headwinds.

This, in turn, might limit discretionary spending and hurt the company’s top line. For instance, Brinker’s business in the Middle East is widely challenged, given the adverse economic factors impacting the region.

Key Picks

Some better-ranked stocks in the same space are Wingstop Inc. (WING - Free Report) , BJ's Restaurants Inc. (BJRI - Free Report) and Dine Brands Global, Inc. (DIN - Free Report) . While Wingstop and BJ's Restaurants sport a Zacks Rank #1 (Strong Buy), Dine Brands carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Wingstop has an impressive long-term earnings growth rate of 19.5%.

Dine Brands Global has reported better-than-expected earnings in the trailing four quarters, with an average beat of 7.8%.

BJ's Restaurants has an impressive long-term earnings growth rate of 15.3%.

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