Can Brinker International's 3Q16 Results Beat Modest Estimates?
EBIT margins
Sales deleverage from Chili’s expected negative same-store sales growth (or SSSG) is expected to lower the EBIT (earnings before interest and tax) margin of Brinker International (EAT). EBIT margins are calculated by dividing EBIT by total revenue. Analysts are expecting the EBIT margins to be 11% in fiscal 3Q16 compared to 12.1% in fiscal 3Q15.
Factors affecting EBIT margins
Analysts are expecting an increase in labor wages due to an increase in the minimum wage. Analysts also expect sales deleverage due to negative same-store sales growth. Brinker International’s (EAT) SSSG is expected to offset the improvement in its cost of food expenses due to the decline in ground beef, seafood, and cheese prices.
The steps adopted by the company to improve its same-store sales growth include the introduction of new menus. The company’s implementation of its technology infrastructure is intended to improve its guests’ digital experience, and it should initially increase the company’s expenses.
During the same period, Brinker International’s peers Texas Roadhouse (TXRH), Buffalo Wild Wings (BWLD), and The Cheesecake Factory (CAKE) are expected to post EBIT margins of 10.9%, 9.5%, and 7.9%, respectively. This compares to EBIT margins of 10.6%, 10%, and 6.9%, respectively, in the corresponding quarter of the previous year.
Outlook
Analysts are expecting Brinker International’s (EAT) EBIT margins to improve to 12.3% in fiscal 4Q16 compared to 12% in fiscal 4Q15. We believe the slight increase in the company’s EBIT margins may be due to sales leverage resulting from positive same-store sales growth.
This increase may also be due to the reduction in loyalty program expenses resulting from the My Chili’s Reward program with Plenti. In fiscal 2017, analysts are expecting the EBIT margins to be 10.1%, the same as in fiscal 2016.
EAT forms 0.19% of the holdings of the iShares S&P Mid-Cap 400 Value ETF (IJJ).
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