Brinker International, Inc.’s (EAT - Free Report) aggressive expansion, sales-building initiatives and robust earnings growth over the past few quarters are commendable. Consequently, the stock has gained 21% in the past three months, outperforming the industry’s 11% growth. However, high costs associated with restaurant operations remain a concern for the company. Let’s delve deeper.
Over the past few quarters, Brinker’s remodeling efforts have gained momentum leading to improvement in sales. This apart, the company continues to invest in its reimage program. In fact, in the first quarter of fiscal 2019, the company invested in a brand-wide reimage program that will drive traffic and comps over the next three years. Brinker’s remodeling initiative is thus expected to continue to invigorate its potential as a brand and augment guests’ experience.
Further, management is gearing up for international expansion, especially in the faster developing emerging markets. Although it is experiencing some headwinds in the Middle East, the company’s Latin American business has been solid. Notably, the company is on the lookout to expand its brand in existing markets and enter new ones. In fiscal 2018, Brinker opened 34 restaurants, bringing its international restaurant count to 383. In fiscal 2019, it expects to open more than 30 restaurants globally, which will include new markets like Asia with focus on China and Vietnam.
Backed by a range of sales-building initiatives, this Zacks Rank #3 (Hold) company remains steadfast in its goal to drive traffic and revenues. These initiatives include streamlining of menu and its innovation, strengthening its value proposition, better food presentation, advertising campaigns, kitchen system optimization and introduction of better service platform. Particularly emphasizing on menu innovation to propel revenues, Brinker started a strategic plan — Vision 2020 — in 2016. This plan focuses on menu innovation in Chili's, and continuous improvement in service and atmosphere to differentiate the brand and gain market traction for achieving long-term earnings per share growth target of 10-15%.
Higher labor costs due to increased wages and costs can be attributed to the implementation of the Affordable Care Act, which is expected to persistently keep profits under pressure. Moreover, the collapse of the Republican-led bill, which was intended to replace Obamacare, means that the Affordable Care Act is here to stay. Consequently, 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 and commodity inflation are expected to continue denting margins. Thus, the company’s profits in the upcoming quarters might remain under pressure despite its cost-saving initiatives. In fact, Brinker expects restaurant operating margin to be down 160-180 basis points in fiscal 2019 as it invests specifically in its core food equities.
Better-ranked stocks worth considering in the same space include BJ's Restaurants, Inc. (BJRI - Free Report) , Dave & Buster's Entertainment, Inc. (PLAY - Free Report) and Darden Restaurants, Inc. (DRI - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
BJ's Restaurants has reported better-than-expected earnings in the trailing four quarters, with an average of 33.2%.
Dave & Buster's Entertainment has an impressive long-term earnings growth rate of 14.8%.
Darden Restaurants’ earnings for the current year is expected to grow by 16.8%.
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