Brinker (EAT) Poised For Long-Term Growth, Risks Remain

On Jul 1, we issued an updated research report on Brinker International, Inc. (NYSE:EAT) .

Based in Dallas, TX, 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.

Scope

The acquisition of 103 franchised Chili’s Grill and Bar restaurants from Pepper Dining Holding Corp. for $106.5 million in Jun 2015, boosted the company’s third-quarter fiscal 2016 results.

Notably, 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. Hence, the Pepper Dining deal turned out to be positive in an industry that depends largely on franchising and the units should thus continue to boost the top and bottom line, going ahead.

Meanwhile, the company initiated a strategic plan — Vision 2020 — in second-quarter fiscal 2016. It focuses on menu innovation in Chili's and continuous improvement in service to differentiate the brand and gain market traction to achieve the long-term earnings growth target of 10% to 15%.

Moreover, the company’s aggressive expansion strategies and sales building initiatives, like menu innovation and introduction of loyalty program, should boost comps. Also, Brinker’s remodeling initiative is expected to continue to invigorate its potential as a brand and enhance guests’ experience.

Additionally, Brinker effectively uses the social media platforms and email database to drive customer awareness and boost traffic. These initiatives should contribute significantly to Brinker’s business growth in the near future.

Concerns

However, Brinker’s revenues have missed the Zacks Consensus Estimate in the trailing five quarters, mainly due to traffic decline at its restaurants. Also, the company’s high exposure in states like Texas, Louisiana and Oklahoma, where the economy is currently sluggish due the continuous decline in oil prices, would continue to hurt traffic.

Meanwhile, 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. Further, higher labor and costs related to various initiatives might continue to hurt margins in the near term.

Zacks Rank & Stocks to Consider

Brinker currently has a Zacks Rank #3 (Hold). Other stocks worth considering in this sector include Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) , Famous Dave's of America Inc. (NASDAQ:DAVE) and Carrols Restaurant Group, Inc. (NASDAQ:TAST) . All the three stocks sport a Zacks Rank #1 (Strong Buy).

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