Brinker Shares Will Underperform; BMO Downgrades

BMO Capital’s Andrew Strelzik expects Brinker International, Inc. EAT shares to underperform, given that the upside is already fully priced for “Trump-led scenario.”

Strelzik downgraded the rating on the company to Underperform, while lowering the price target to $45.

Reasons For Underperformance

“We have heightened concerns that EAT’s sales drivers may not be sufficiently appealing to customers to stem the tide of same-store sales weakness, potentially requiring a revamp of its consumer-facing initiatives,” the analyst mentioned.

The FYQ2 same-store stores are likely to miss expectations, while the FY 2017 comp guidance is likely to be revised lower.

In addition, the FY 2017 margins are expected to miss the guidance, with little opportunity to expand margins in FY 2018.

Other Concerns

Strelzik also noted that Brinker International’s cost savings opportunities were mostly lagging that of its peers, while the company’s realization of food deflation was likely to also lag that of its peers.

The analyst also expressed concern regarding the company’s “limited pricing power, accelerating labor inflation, and a G&A step-up from a stock-based compensation reload,” which were likely to limit margin opportunities.

In addition, Brinker International’s growth is expected to slow down as the company’s share buybacks increase its dependence on operating performance.

Shares of Brinker closed Wednesday trading at $52.57.