Ahead of the Company's analyst meeting, EAT is reporting summary 1Q22 numbers, and it is precisely why we are short Casual Dining names. The Company reported EPS of $0.34 (ex-items) vs. FS $0.68 and below the low end of the $0.49-$0.88 range. In addition, preliminary 1Q22 sales of $876 MM were in line with consensus.
The issues for the EPS miss are blamed on the COVID surge in August for higher-than-expected labor and commodity costs. Restaurant operating margin decreased to 10.4% compared to 11.6% in Q1 2021, driven by 150 bps of higher labor costs and 60 bps of higher commodity costs. The Company said it would implement price increases over the next year to offset inflationary pressures, and with this will come concerns over sustained demand for dining. As we said in our Black Book, reopening is hard! The labor challenges from the current sales environment are challenging for several reasons, while sales are slowing by 57% for EAT! EAT specifically cited "temporary incremental overtime and training costs," which are not all-in transitory. All of this comes as no surprise and the incremental concern that the acceleration in same-store sales in CY22 is unlikely to happen (chart below).
The official company commentary: "Brinker's Q1 delivered positive sales and continued to significantly outpace the industry in traffic. But the COVID surge starting in August exacerbated the industry-wide labor and commodity challenges and impacted our margins and bottom line more than we anticipated. We are responding to these COVID headwinds with an increased focus on hiring and retention efforts and working with our partners to gain further stabilization of the supply chain environment. In addition, we have taken immediate incremental pricing actions, increasing our full-year target to 3.0%-3.5%, to offset inflationary costs and protect margins as we move forward."
The comments about the supply chain are new, and I would expect this to be an important topic at the analyst's meeting.
This new 3-4% pricing is on top of an aggressive increase in industry-wide average checks.
