Brinker International, Inc. EAT is scheduled to release second-quarter fiscal 2018 results on Jan 30, after market close.
In the first quarter, the company missed the Zacks Consensus Estimate for earnings by 2.33%. However, despite missing earnings in two quarters, Brinker recorded positive average earnings surprise of 1.69% in the trailing four quarters.
First-quarter results were particularly affected by hurricanes. Moreover, a competitive yet challenging restaurant space has been denting margins.
Shares of Brinker have lost 13.7% in the past year, underperforming the industry’s rally of 22.3%. Also, earnings estimates for the to-be-reported quarter remained unchanged over the past 60 days, reflecting analysts’ concern surrounding the limited upside potential of the stock.
Let’s take a look at how Brinker’s second quarter might shape up.
Chili’s Turnaround Might Drive Top Line
The consensus estimate for sales in the to-be-reported quarter is pegged at $773.04 million, reflecting 0.3% year-over-year growth. The company’s initiatives to build traffic and sales might drive the top line in the quarter.
Particularly, the turnaround in Chili’s bodes well. In the first quarter, the company completed finalizing its turnaround strategy for Chili's, including a new menu as well as marketing and operational focus. Brinker also implemented a new menu with 40% fewer items than a year ago, supported by an aggressive marketing strategy. A simpler menu, better quality, faster execution and stronger value are expected to aid Chili's turnaround. In fact, the ongoing momentum resulting from the menu launch has been positive and will help drive traffic at Chili's in the to-be-reported quarter.
Digital initiatives — particularly those pertaining to Chilli’s — are also a positive. The company is investing heavily in technology-driven initiatives, like online ordering, to augment sales and boost guest services. Having installed a tabletop technology at its company-owned restaurants in partnership with Ziosk, the company has implemented handheld devices at its restaurants in California. This is resulting in increased efficiency and speed. Moreover, Brinker effectively uses the social media platform and email database to drive customer awareness and boost traffic.
Meanwhile, Brinker’s partnership with mobile and online food ordering service, Olo, for its To-Go platform, continues to provide digital services to restaurants and offers Chili's customers with pre-order, group order and pay flexibility. This integration is helping the company garner more members for the loyalty program, and thereby retain customers. Brinker also stands to gain from integrating its My Chili's Reward program with Plenti — a rewards program by American Express that offers leading brands across multiple categories. It gives Chili’s access to Plenti’s huge database of members and is likely to drive sales and profits in the to-be-reported quarter.
Higher Costs to Dent Bottom Line
Despite the cost-cutting efforts, Brinker is bearing the brunt of increased costs from the sales-driving initiatives. Menu innovation, operational expenses, advertising costs coupled with commodity inflation are expected to hurt margins in the second quarter. Lower margins will in turn hurt earnings.
The consensus estimate for second-quarter earnings is pegged at 70 cents, reflecting a 1.4% year-over-year decline.
Also, higher labor costs due to increased wages are likely to hurt profits. In fact, the company expects restaurant operating margin to be down 25 to 40 basis points in fiscal 2018.
Our Quantitative Model Doesn’t Suggest a Beat
Per the Zacks quantitative model, Brinker does not have the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.
Zacks ESP: Brinker has an Earnings ESP of -0.24%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: The company has a Zacks Rank #3.
Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Brinker International, Inc. Price and EPS Surprise
Stocks to Consider
Here are a few stocks from the restaurant space that investors may consider, as our model shows that they have the right combination of elements to post earnings beat this quarter:
Potbelly PBPB has an Earnings ESP of +4.76% and a Zacks Rank #3. The company is expected to release its quarterly numbers on Feb 13. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Cracker Barrel Old Country Store CBRL has an Earnings ESP of +1.03% and a Zacks Rank #2 (Buy). The company is expected to report its quarterly numbers on Feb 20.
Fogo de Chao FOGO has an Earnings ESP of +2.11% and a Zacks Rank #3. The company is expected to release its quarterly numbers on Mar 13.
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