Delta COVID Cuts Into Brinker International, Inc. Results

Brinker International Falls On Weak Preliminary Results

We called a bottom for Brinker International NYSE: EAT following the last earnings report but that was before the company caught COVID. The company missed the consensus estimate for calendar Q2 by a slim margin but produced a high 20% growth rate versus the two-years ago period. Along with that, the company widened its margins, greatly improved its profitability, and had itself on track to resume paying a dividend. Now, with Delta COVID cutting deeply into the results it looks like that thesis is in the dumper. As it stands, shares of Brinker International are trading at the lowest levels since late last year and could move lower it trends in the economy don't begin to change.

Brinker International Will Begin Raising Prices

Brinker International shocked the stock market by issuing preliminary results that were much weaker than expected. The company says revenue came in at $859.60 million or $16.60 million weaker-than-expected. The shortfall is shocking but only 190 basis points so not as bad as it could have been. The more shocking news, however, is on the bottom line with EPS of only $0.34. This is well below the average analyst expectation and missed the consensus by $0.37.

The underlying cause of the weakness is COVID and specifically the rise of Delta COVID but systemic headwinds throughout the supply chain are also having an impact. The company says restaurant-level margins shrank 120 basis points on a sequential basis on a 150 basis point increase in labor cost and a 60 basis point increase in commodity costs. Based on our assessment of the foodservice industry and widespread labor shortages across all industries, we do not expect labor inflation to cease. If anything, it will continue to rise for some time. As for commodity costs, they should begin to stabilize along with the global supply chain but who knows when that's going to happen.

Brinker also announced price hikes to combat the inflation cutting into profits. Price hikes of 3% to 3.5 % will hit the menu over the next 12 months and should help offset some of this quarter's weaknesses. The risk for Brinker and for investors is that inflation continues to rise unabated so the 3% to 3.5% price increases may not be enough. 

The Analysts Are Still Bullish On Brinker International

The analysts are still bullish on Brinker International but the sentiment has been waning. The most recent activity is a series of price-target downgrades that has the consensus estimate down nearly 6% over the last 90 days. The Marketbeat.com consensus price target is just above $67 and implies a 47% upside for the stock. The high price target of $85 was set by Telsey Advisory Group way back in the spring and is not be relevant anymore.

The Technical Outlook: Brinker Might Be At Support, Maybe

Shares of Brinker International fell more than 6.5% percent in the wake of the preliminary results and fell below a key support level. While price action is still above what may be a strong support level there is a greater risk here. Price action over the past few months has formed a clear downtrend and bearish triangle that has been confirmed by today's price action. Price action may rise in the near term but if it is unable to reclaim the upper side of the $48 support level, another sell-off is most likely in store. If price action continues to slide, the next target for firm support is near the $40 level.