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  1. Home
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Does Brinker's Stinker of a Quarter Portend Tougher Times for Other Eateries?

Pressure from higher labor and commodity costs hurt Brinker's bottom line and could signal trouble ahead for other operators.
By JONATHAN HELLER
Oct 25, 2021 | 10:30 AM EDT
Stocks quotes in this article: EAT, MCD, CMG

Whether Brinker International's (EAT) preliminary first-quarter earnings release will be a cautionary tale for the sector remains to be seen, but the numbers were something to behold. Preliminary revenue of $859.6 million was off consensus by about $17 million -- not horrible in the scheme of things. However, earnings per share of 34 cents missed the 71-cent consensus by a unhealthy 37 cents. Shares fell nearly 10% Wednesday in the aftermath and are now down 21% year to date.

When revenue is close to the mark but the bottom line is not, expenses were likely higher than expected, and in this case, EAT's operating income fell from 11.6% to 10.4% versus the same quarter last year. The latest first quarter included higher labor costs (up 150 basis points) and higher commodity costs (up 60 basis points). Those increases may not sound that dramatic. However, most restaurant margins are already fairly thin -- EAT's net profit margin for 2021 was 3.9% -- so even seemingly small increases in costs can have a dramatic effect on profitability. 

Brinker's recourse, not unexpectedly, will be to increase menu prices from 3% to 3.5% over the next year. Get used to that; we'll likely be seeing more of the same from other operators.  I paid more than nine bucks for a Quarter Pounder with cheese and fries this past Friday at a local McDonalds (MCD) , which might be enough for me to give up that occasional treat.  According to the Labor Department, fast food prices rose 6.7% for the 12 months ended Sept. 30.

Price increases may not keep consumers from flocking to restaurants in the near term, though they might just not eat out as often or could be more selective, which would impact both the bottom line and valuations. The difference will be whether particular names have pricing power or not -- i.e., will customers continue to show up despite price increases? 

The analyst community believes that may be the case with a name such as Chipotle Mexican Grill (CMG) , which reported better-than expected third-quarter earnings after market close last Thursday. Chipotle exceeded consensus estimates on both the top and bottom lines, with earning per share of $7.02, well ahead of the $6.33 consensus. This was a great quarter for Chiptole, yet shares still fell 3%. It is worth noting that CMG currently trades at 53x next year's consensus estimates, not exactly cheap.

Stay tuned, this situation is just beginning to unfold.

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At the time of publication, Heller had no positions in the stocks mentioned.

TAGS: Earnings | Investing | Stocks | Consumer | Restaurants | Real Money

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