Breaking Down Brinker International, Inc. (EAT) Financial Health: Key Insights for Investors

Understanding Brinker International, Inc. (EAT) Revenue Streams

Understanding Brinker International, Inc.’s Revenue Streams

The company's revenue is primarily derived from two segments: Company-owned restaurants and franchise operations. The following table outlines the revenue breakdown for the thirteen-week periods ended September 25, 2024, and September 27, 2023.

For the thirteen-week period ended September 25, 2024, the total revenue increased by 12.5% compared to the same period in 2023. The increase in revenue was driven largely by an increase in sales from Company-owned restaurants, which saw a growth of $125.3 million.

Year-over-Year Revenue Growth Rate

The year-over-year revenue growth for Company-owned restaurants and franchise revenues is detailed below:

Continuing with the year-over-year revenue growth, Company-owned sales increased by 12.5%, while franchise revenues grew by 11.4%, indicating a strong performance across both segments.

Contribution of Different Business Segments to Overall Revenue

The contribution of each segment to the overall revenue for the thirteen-week period is as follows:

Company-owned restaurants accounted for 99.0% of total revenues, while franchise operations contributed only 1.0%. This highlights the dominance of Company-owned operations in the overall revenue structure.

Analysis of Significant Changes in Revenue Streams

Significant changes in revenue streams for the thirteen-week period ended September 25, 2024, include:

• Increase in comparable restaurant sales driven by menu pricing and higher traffic.
• Company-owned sales increased by $125.3 million due to operational improvements and enhanced customer engagement.
• Franchise revenues increased primarily due to higher royalties and franchise advertising fees, with franchisee sales generating approximately $225.7 million for Company-owned restaurants compared to $202.8 million in the prior year.

The revenue from franchise operations shows an upward trend, but it remains a small fraction of the total revenue, underscoring the reliance on Company-owned operations for revenue generation.

A Deep Dive into Brinker International, Inc. (EAT) Profitability

Profitability Metrics

The profitability metrics of the company provide critical insights into its financial health. Key indicators include gross profit, operating profit, and net profit margins, which are essential for evaluating performance over time.

Gross Profit, Operating Profit, and Net Profit Margins

For the thirteen-week period ending September 25, 2024, the financial metrics were as follows:

In comparison, for the same period in 2023, the metrics were:

Trends in Profitability Over Time

Examining the changes in profitability metrics from 2023 to 2024 reveals a significant improvement:

• Gross Profit: Increased from $258.8 million to $284.3 million.
• Operating Profit: Increased from $24.2 million to $56.4 million.
• Net Profit: Increased from $7.2 million to $38.5 million.

Comparison of Profitability Ratios With Industry Averages

When compared to industry averages, the company's profitability ratios indicate a competitive position:

• Industry Average Gross Margin: Approximately 25%.
• Industry Average Operating Margin: Approximately 5%.
• Industry Average Net Margin: Approximately 3%.

The company’s gross margin is slightly below the industry average, while both operating and net margins exceed the industry averages, indicating effective cost management and operational efficiency.

Analysis of Operational Efficiency

The operational efficiency of the company can be assessed through various cost management strategies:

• Food and Beverage Costs: Reduced from 26.0% of sales in 2023 to 25.2% in 2024.
• Restaurant Labor Costs: Decreased from 34.8% to 33.5% of sales.
• Restaurant Expenses: Decreased from 29.0% to 27.8% of sales.

These reductions in costs, alongside improved sales, highlight successful operational strategies that enhance profitability.

Debt vs. Equity: How Brinker International, Inc. (EAT) Finances Its Growth

Debt vs. Equity: How Brinker International, Inc. Finances Its Growth

Debt Levels

As of September 25, 2024, the company reported total long-term debt of $806.9 million, which includes:

• Revolving credit facility: $25.0 million
• 5.000% senior notes: $350.0 million
• 8.250% senior notes: $350.0 million
• Finance lease obligations: $101.1 million

The total current liabilities were $577.5 million, which includes accounts payable of $152.1 million and accrued payroll of $97.7 million.

Debt-to-Equity Ratio

The debt-to-equity ratio as of September 25, 2024, is calculated as follows:

Total Liabilities: $1,408.5 million (including long-term debt and current liabilities) and Total Shareholders' Equity: $12.7 million.

Debt-to-Equity Ratio: 110.73 (calculated as $1,408.5 million / $12.7 million). This ratio indicates a significantly higher reliance on debt compared to equity, which is above the industry average of approximately 50-70.

Recent Debt Issuances and Credit Ratings

On October 1, 2024, the company repaid its $350.0 million of 5.000% senior notes using available capacity under its revolving credit facility. The interest rate on the revolving credit facility, as of September 25, 2024, was 6.46%, based on SOFR of 4.86% plus an applicable margin of 1.60%.

The company remains compliant with the financial covenants of its debt agreements as of the same date.

Balancing Debt Financing and Equity Funding

In the thirteen-week period ended September 25, 2024, the company reported net cash used in financing activities of $54.7 million, which included:

• Net borrowings on the revolving credit facility: $25.0 million
• Purchase of treasury stock: $74.8 million
• Payments on long-term debt: $8.2 million

The company has a share repurchase program approved for $300.0 million as of fiscal 2022, with approximately $117.0 million remaining under this authorization as of September 25, 2024.

Assessing Brinker International, Inc. (EAT) Liquidity

Assessing Brinker International's Liquidity

Current Ratio: As of September 25, 2024, the current ratio is calculated as follows:

The current ratio indicates that for every dollar of liability, the company has $0.32 in liquid assets, which suggests potential liquidity concerns.

Quick Ratio: The quick ratio, which excludes inventories, is calculated as follows:

This quick ratio of 0.12 further emphasizes the liquidity challenges faced by the company, as it indicates a significant shortfall in liquid assets to cover current obligations.

Analysis of Working Capital Trends

Working capital, defined as current assets minus current liabilities, is as follows:

This trend shows a decrease in working capital from the previous quarter, indicating a growing liquidity concern over time.

Cash Flow Statements Overview

Cash flows from different activities for the thirteen-week period ended September 25, 2024, are summarized as follows:

The net cash provided by operating activities has increased by $3.7 million compared to the previous period. However, substantial cash outflows from investing and financing activities raise concerns regarding overall liquidity.

Potential Liquidity Concerns or Strengths

As of September 25, 2024, the company has $16.2 million in cash and cash equivalents, down from $64.6 million at the beginning of the period. The decrease in cash reserves alongside rising liabilities could signal liquidity challenges. Furthermore, the company has $875.0 million available under its revolving credit facility, which may provide some short-term relief but also indicates reliance on debt to manage liquidity.

Is Brinker International, Inc. (EAT) Overvalued or Undervalued?

Valuation Analysis

To assess whether the company is overvalued or undervalued, we will analyze key financial ratios including the price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA). Additionally, we will review stock price trends, dividend yield, payout ratios, and analyst consensus on stock valuation.

Price-to-Earnings (P/E) Ratio

The P/E ratio is a critical indicator of valuation. As of the latest financial data:

• Current stock price: $70.67
• Basic net income per share: $0.86
• P/E Ratio: 82.06 (calculated as Stock Price / Earnings Per Share)

Price-to-Book (P/B) Ratio

The P/B ratio provides insight into how much investors are willing to pay for each dollar of net assets. The relevant figures are:

• Total assets: $2,533.1 million
• Total liabilities: $2,520.4 million
• Shareholders’ equity: $12.7 million
• P/B Ratio: 5,563.11 (calculated as Stock Price / (Total Assets - Total Liabilities))

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

To evaluate the company's overall valuation, we will also consider the EV/EBITDA ratio:

• Market capitalization: $3.15 billion
• Total debt: $826.1 million
• Cash and cash equivalents: $16.2 million
• EBITDA: $56.4 million
• Enterprise Value (EV): $3.96 billion (calculated as Market Cap + Total Debt - Cash)
• EV/EBITDA Ratio: 70.26 (calculated as EV / EBITDA)

Stock Price Trends

Examining the stock price trends over the past 12 months:

• 12-month high: $75.00
• 12-month low: $50.00
• Current price: $70.67
• Percentage change over the last year: +17.34%

Dividend Yield and Payout Ratios

For dividend investors, the following metrics are relevant:

• Annual dividend per share: $1.20
• Current dividend yield: 1.70% (calculated as Annual Dividend / Current Stock Price)
• Payout ratio: 31.4% (calculated as Annual Dividend / Earnings Per Share)

Analyst Consensus on Stock Valuation

The consensus among analysts regarding the stock's valuation is as follows:

• Buy: 5 analysts
• Hold: 10 analysts
• Sell: 2 analysts

Key Risks Facing Brinker International, Inc. (EAT)

Key Risks Facing Brinker International, Inc.

Brinker International faces several internal and external risks that could impact its financial health in 2024 and beyond. These risks include industry competition, regulatory changes, and fluctuating market conditions.

Industry Competition

The restaurant industry is highly competitive, with numerous players vying for market share. In the thirteen-week period ended September 25, 2024, total revenues increased by 13.5% compared to the same period in 2023, reaching $1,139.0 million. This growth is partly driven by favorable comparable restaurant sales, but persistent competition could pressure margins and market position.

Regulatory Changes

Changes in regulations, including health and safety standards, labor laws, and food safety requirements, can affect operational costs. As of September 25, 2024, the effective income tax rate was 9.0%, compared to a federal statutory rate of 21.0%. Compliance with evolving regulations may require additional investments and resources, impacting profitability.

Market Conditions

Fluctuating economic conditions, such as inflation and changes in consumer spending, pose risks. The company reported a significant increase in general and administrative expenses, up to $51.8 million in the thirteen weeks ended September 25, 2024, from $42.4 million in the previous year. Rising costs related to labor and commodities could further squeeze profit margins.

Operational Risks

Operational challenges can arise from fluctuations in food and beverage costs, which accounted for 25.4% of company sales in the same period. Labor costs also represent a significant portion of expenses, with restaurant labor costs at 33.5%. Increases in these costs can significantly impact overall profitability.

Financial Risks

The company has a revolving credit facility of $900.0 million, maturing on August 18, 2026, with an interest rate of 6.46% as of September 25, 2024. A hypothetical 100 basis point increase in interest rates could lead to an additional $0.3 million in annual interest expense.

Strategic Risks

Decisions regarding capital allocation and investments in new technologies or restaurants carry inherent risks. The company has a share repurchase program with approximately $117.0 million remaining as of September 25, 2024. While share repurchases can enhance shareholder value, they also divert funds from other potential investments.

Mitigation Strategies

The company is actively monitoring macroeconomic conditions and adjusting its approach to capital allocation as necessary. This includes focusing on cash flow generation and maintaining a flexible financial position. The management's compliance with financial covenants under its debt agreements mitigates some financial risks, ensuring operational stability.

Future Growth Prospects for Brinker International, Inc. (EAT)

Future Growth Prospects for Brinker International, Inc.

Analysis of Key Growth Drivers

The company is focusing on several key growth drivers to enhance its market position. These include:

• Product Innovations: The introduction of new menu items and seasonal offerings has been pivotal. For instance, the company reported a 13.5% increase in total revenues, reaching $1,030.4 million for the thirteen weeks ending September 25, 2024, compared to $908.1 million in the same period the previous year.
• Market Expansions: The company aims to expand its footprint both domestically and internationally. It plans to open approximately 22-29 new franchise restaurants in fiscal 2025.
• Acquisitions: Strategic acquisitions have been hinted at, which could enhance market share and operational synergies.

Future Revenue Growth Projections and Earnings Estimates

Analysts project robust revenue growth driven by increasing consumer demand and effective marketing strategies. The following table summarizes revenue growth projections:

Strategic Initiatives or Partnerships that May Drive Future Growth

Strategic initiatives include:

• Franchise Development: The company reported a total of 14 new franchise restaurant openings during the last quarter, indicating strong franchisee interest.
• Digital Transformation: Investments in digital ordering and delivery platforms are expected to enhance customer experience and drive sales.
• Partnerships: Collaborations with delivery services to expand market reach and convenience for customers.

Competitive Advantages that Position the Company for Growth

The company benefits from several competitive advantages, including:

• Brand Recognition: Strong brand loyalty, particularly for its flagship restaurant chain, positions the company favorably in a competitive market.
• Operational Efficiency: Streamlined operations have resulted in improved margins, as evidenced by a 56.4 million operating income for the latest quarter.
• Cost Management: Effective cost management strategies have resulted in a decrease in interest expenses to $14.3 million from $17.0 million, enhancing profitability.

Article updated on 8 Nov 2024

Resources:

• Brinker International, Inc. (EAT) Financial Statements – Access the full quarterly financial statements for Q1 2025 to get an in-depth view of Brinker International, Inc. (EAT)' financial performance, including balance sheets, income statements, and cash flow statements.
• SEC Filings – View Brinker International, Inc. (EAT)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.