Manny Rodriguez/Courtesy of Brinker
the parent of Chili’s Grill & Bar, has been a Covid pandemic loser and a reopening winner. Now, investors are treating shares of the casual-dining company like a loser once again. That has created a buying opportunity in the small-cap stock.
Dallas-based Brinker (ticker: EAT) operates or franchises more than 1,600 restaurants in 29 countries. For a while, it looked as if the company had successfully navigated the pandemic. In the three months beginning Dec. 15, 2020, its stock gained 41% as investors bet that a reopening economy and pent-up demand would provide a big boost to earnings. Recent results, however, have called that rosy outlook into question. A cold February was blamed for disappointing results in the chain’s fiscal third quarter, ended March 24. The stock has fallen 21% since mid-March, to a recent $57.35, giving Brinker a market cap of about $2.9 billion.
Not so fast. U.S. consumers are flush with cash, restaurants are reopening, and fast-food prices are rising relative to those at casual-dining eateries–all trends that Brinker is poised to exploit. “Consumers are chomping at the bit to get out,” says Gary Bradshaw, a portfolio manager at the
fund (HDPSX). “As long as vaccinations keep heading in the right direction, we think Brinker will be an outperformer.”
You might not know Brinker, but you probably know Chili’s, the popular bar-and-grill chain that accounted for more than 88% of the company’s fiscal 2020 revenue of $3.1 billion. Brinker also owns Maggiano’s Little Italy, and it launched the delivery-only brand It’s Just Wings in June of last year. The Wings concept soared during the pandemic, even as Chili’s and Maggiano’s struggled to offset indoor-dining losses with off-premise orders. Total earnings per share fell more than 56% last year.
Things are looking up now. While Brinker’s fiscal third-quarter revenue and earnings came in below expectations, management struck an upbeat tone, noting that April sales were about 10% above prepandemic 2019 levels. Growth at It’s Just Wings is slowing, but that segment is still on track to notch roughly $150 million in sales for the full fiscal year, while Chili’s and Maggiano’s could see sales grow by a combined 8% or so, to $3.3 billion.
Painful as they were, Covid-induced restaurant closures might have been a blessing in disguise for Brinker, maintains Piper Sandler analyst Nicole Miller Regan.
Brinker entered the pandemic with a long stretch of lackluster comparable-store sales. Going back to its margarita-and-fajita roots, the company also built out its delivery business, boosted its digital sales, and embraced the growing “ghost kitchen” trend of takeout- and delivery-only restaurants. The result is a company that looks set to take market share from rivals and deliver upside earnings surprises.
“During a crisis, you see who can perform and who can’t,” says Regan. “Brinker took the crisis as an opportunity to structurally improve its brand.”
As a result, Brinker’s earnings look set to surpass their prepandemic level. Profits are expected to jump 81% in the current fiscal year, to $3.10 a share, and 61% in 2022, to $4.98–one of the higher expected growth rates among restaurant stocks. Companies such as
(DIN),
(TXRH), and
Cracker Barrel Old Country Store
(CBRL) could see triple-digit growth rates, but don’t trade as cheaply.
Brinker stock remains the cheapest among the 19 biggest U.S. restaurant stocks. The shares change hands for 11.5 times forward earnings, just under their five-year average, and well below
‘ (DRI)’s 19.2 times and
(CAKE) 22.7 times. If the stock were to earn a multiple of 16 times, it could trade as high as $80, says Hodges’ Bradshaw. “Brinker did a fabulous job throughout the pandemic…and takeout is still pushing earnings up even as everything reopens,” he says.
A more normal business environment is good news for restaurants generally, but casual dining could benefit more than fast food, which traditionally had a larger takeaway business.
Casual dining might also be less exposed to rising prices, according to Dan Ahrens, portfolio manager of the recently launched
exchange-traded fund (EATZ), which counts Brinker among its top 15 holdings. “The gap between fast-food and fast-casual prices has shrunk,” he says. “Chili’s might be in the sweet spot.”
The same is true of Brinker stock.
Write to Teresa Rivas at teresa.rivas@barrons.com
