Just last week, Brinker announced that it was raising its hourly, entry-level wages to $18 per hour in an effort to attract and retain workers. Many bulls are hoping that we are "peaking" in terms of inflationary pressures, while the continued improvement in the coronavirus situation may lead to a resumption in foot traffic. The bears would contend that inflationary pressures are here to stay which means that margins will continue to compress especially as Brinker's target market may be unable to digest higher prices without impacting demand.
Inside the Numbers
In Q3, Brinker reported earnings per share of $0.34 which was significantly below analysts' estimates of $0.68, while revenue came just under consensus at $876.4 million vs $876.8 million. The company attributed the weakness in its bottom-line to the coronavirus surge in August and September which exacerbated the labor situation and reduced the number of people visiting restaurants for dine-in.
Operating margins declined to 10.4% from 11.6% in the first quarter of last year due to higher labor costs and food prices. Many other restaurant stocks have struggled due to this issue as well.
Of course, these struggles come about as restaurants thrived during the first part of the year with massive pent-up demand for people to eat out. Additionally, many restaurants were able to augment their delivery and takeout segments during the pandemic to offset significant portions of lost revenue, resulting in higher-margin sales on a per-unit basis.
Stock Price Outlook
Brinker and most restaurant stocks are in a tricky place. It's quite possible that this quarter was uniquely bad in terms of inflationary pressures peaking, while the delta variant led to decreased sales. We know that the latter factor is going to go from a headwind to a tailwind next quarter as case counts are plunging.
And, there is hope that plunging case counts will also lead to some improvements in the inflation situation as it could mean that more people will reenter the workforce and some of the bottlenecks and transportation issues that are contributing to inflation may finally abate.
In a vacuum, Brinker's stock looks very attractive as it's down nearly 45% since its March high. Even with its earnings miss, it's quite cheap with a forward P/E of 8.3, compared to the S&P 500's forward P/E of 21. However, this may not matter as Brinker's stock would likely continue to struggle if inflationary pressures continue to build.