By Sam Boughedda
Shares of Brinker International (NYSE:EAT) were downgraded from Overweight to Sector Weight by a KeyBanc Capital Markets analyst on Thursday, following the stock's 40%+ run over the last month.
"We believe the stock's upward trajectory was a function of improved sentiment with commodity prices likely peaking. But the prospect of deteriorating consumer confidence/spending over the next year limits earnings visibility and our willingness to recommend shares, with the stock now trading above our previous $30 PT," said the analyst.
In addition, KeyBanc also expects FY23 guidance to be below consensus.
"While inflation has moderated since the spring peak, we believe the margin picture for Brinker is likely worse than previously assumed by our peers. Our best guess is Brinker guides FY23 EPS to a range that includes our estimate, with upside to that number dependent on its inflation outlook, labor efficiencies, pricing power, and to what extent the new management team sets conservative targets. Chili's pricing—at 6% y/y in June—is 1-2 points below its peers and remains a potential lever, but one that goes against its traffic-centric strategy," added the analyst.
The analyst concluded that a changeover in management also introduces the potential for a reinvestment cycle at a time when cost pressures remain a challenge.
"We trim our F4Q EPS estimate based on softer NT SSS trends. Our F4Q22/FY23 EPS estimates are 4%/14% below consensus but perhaps more in line with expectations."
Despite the downgrade, Brinker shares gained 1% Thursday.