Shareholders of Brinker International would probably like to forget the past six months even happened. The stock dropped 20.6% and now trades at $143.26. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Brinker International, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Is Brinker International Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid EAT and a stock we'd rather own.
1. Lack of New Restaurants, a Headwind for Revenue
A restaurant chain’s total number of dining locations influences how much it can sell and how quickly revenue can grow.
Brinker International listed 1,630 locations in the latest quarter and has kept its restaurant count flat over the last two years while other restaurant businesses have opted for growth.
When a chain doesn’t open many new restaurants, it usually means there’s stable demand for its meals and it’s focused on improving operational efficiency to increase profitability.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Brinker International’s revenue to rise by 3.5%, a deceleration versus This projection is underwhelming and implies its menu offerings will face some demand challenges.
3. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margins are an important measure of a restaurant’s pricing power and differentiation, whether it be the dining experience or quality and taste of food.
Brinker International has bad unit economics for a restaurant company, signaling it operates in a competitive market and has little room for error if demand unexpectedly falls. As you can see below, it averaged a 17% gross margin over the last two years. That means Brinker International paid its suppliers a lot of money ($82.99 for every $100 in revenue) to run its business. 
Final Judgment
Brinker International isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 14.1× forward P/E (or $143.26 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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