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Recent data points from and pertaining to the casual dining space are cautious at best.  Keith sold Brinker today in the Hedgeye Virtual Portfolio.  His quantitative analysis corroborates our fundamental view of the stock.  Being Brinker Bulls has been kind to us since 2010, and those of our clients that got on board, but the stocks in this space trade in unison and due to our concerns about casual dining here and now, we must change with the facts.

Again, we have been positive on Brinker on all three durations (TRADE, TREND, TAIL) since mid-2010.  Following the company reporting 2QFY12 earnings, the stock sold off on concerns that top-line trends were suggesting that the company may not hit comparable restaurant sales targets for the full year.  While the stock has more than recovered from those concerns, we believe that the recent industry trends are likely to revive investor anxiety as the next catalyst, 3QFY12 EPS on 4/27. 

This upcoming quarter is the litmus test for Brinker.  At the outset of the quarter, we could see a plan that could bring Chili’s sales to the 3-4% (2% price, 1% mix, positive traffic) that will get the company back on track to meet 2% FY12 comparable restaurant sales guidance.  The most variable of the aforementioned components of the 3-4% comp is traffic.  Consistent with broader industry trends slowing into March and remaining soft in early April, our confidence in Chili’s traffic meeting our prior expectations has decreased.  Chili’s is not immune to the broader industry trends.

While Brinker’s balance sheet, generation of free cash flow, and operating margins are among the best in the industry and a testament to the fine job management has done over the last couple of years, comparable restaurant sales is the most important chapter of the turnaround story.  The street has been very unforgiving of the management team and we don’t expect investors to shrug off any top-line softness.

From a tail perspective, we believe that the improved operating platform at Chili’s will allow the chain to continue to take share.  Over the TRADE and TREND, however, we’d be selling here.

EAT - TRADE UPDATE   - eat levels

Howard Penney

Managing Director

Rory Green