Innovative Guest Experience And Technology Investments To Propel Revenue And Margin Growth

Key Takeaways

• Menu innovations and a barbell pricing strategy are expected to attract a broader customer base, potentially increasing check sizes and net margins.
  
• Investments in technology and operational efficiency aimed at enhancing the guest experience are likely to drive sustained traffic growth and improve margins.
  
• Concerns over wage and commodity inflation, risky investments in labor and media, and over-reliance on a single value proposition could pressure earnings and margins.

Catalysts

Engages in the ownership, development, operation, and franchising of casual dining restaurants in the United States and internationally.

• Continued focus on improving the guest experience through operational simplification and investments in technology to create an inviting environment is expected to drive sustainable traffic growth, positively impacting revenues and margins.
  
• Investments in labor and facilities, aimed at delivering record food grade scores and improving overall guest experience, are anticipated to enhance customer satisfaction and repeat visits, further boosting revenue.
  
• Menu innovations and the implementation of a barbell pricing strategy aim to cater to a wider range of customer preferences, potentially increasing average check sizes and positively affecting net margins.
  
• Strategic marketing efforts, including leveraging social media and targeted advertising, are designed to increase brand relevance and attract new customers, contributing to higher traffic and revenue growth.
  
• The focus on reducing inventory complexity and operational processes could lead to more efficient operations and reduced costs, positively influencing restaurant operating margins and net earnings.

Assumptions

• Analysts are assuming Brinker International's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 5.1% in 3 years time.
• Analysts expect earnings to reach $246.8 million (and earnings per share of $5.6) by about September 2027, up from $155.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2027 earnings, down from 20.0x today. This future PE is lower than the current PE for the US Hospitality industry at 19.5x.
• Analysts expect the number of shares outstanding to grow by 0.74% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.51%, as per the Simply Wall St company report.

Risks

• There are concerns about the impact of wage rate inflation and commodity inflation on profit margins, potentially impacting net margins and earnings.
  
• Incremental planned investments into fiscal '25, including an additional $15 million to $20 million in labor and approximately $15 million to $18 million more in media, could pressure earnings if these investments do not generate expected returns.
  
• The reliance on a single value proposition ($10.99 offer) to drive traffic, despite its current success, may not be sustainable long-term and could risk margins if the mix shifts unfavorably or if guest preferences change.
  
• The strategy to refresh the $10.99 message with new product news in the back half of the year introduces execution risk that may impact revenue and margins if the new offerings do not resonate with customers as expected.
  
• The optimistic projection of restaurant operating margin improvement of 30 to 50 basis points year-over-year in fiscal '25 might not materialize if faced with unexpected headwinds such as greater-than-anticipated inflationary pressures or weaker-than-expected sales growth, affecting net margins and earnings.

Valuation

• The analysts have a consensus price target of $67.75 for Brinker International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.9 billion, earnings will come to $246.8 million, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 8.5%.
• Given the current share price of $69.14, the analyst's price target of $67.75 is 2.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.