Brinker International mean reversion inevitable, says Wells Fargo

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Wells Fargo analysts told investors that they see a name priced for turnaround upside, but state initiatives are in the early days, while EAT underperforms in a slowing macro, and the “asset is prone to heightened trade down and promotion.”

“EAT hasn’t seen positive traffic in 4 Qs, and we model FY24 comps -80bps below-Street as 13pts of ’23 price/mix benefits is likely more than halved. Traffic begins the year -300bps in the hole (via 1-2pts lower promo & 1.5-2pts from MIC wind down), the industry is slowing, and EAT efforts to ‘upgrade’ its menu (to drive profits) could be offset by check mgmt and/or consumer reluctancy to change behavior,” they wrote.

“Turnaround progress is evident via shrinking the traffic gap 6pts (vs. peers) behind a return to TV, reducing value mix 7pts, and improvements across guest metrics. That said, a slowing macro with industry visits coming under pressure and peers ratcheting up value/promo messaging could complicate efforts. We see downside to comp estimates given EAT’s tendency to underperform in softer economic backdrops historically.”

The analysts concluded that EAT trades at a 6% premium to its 3-year average, compared to a -4% discount for the group. As a result, they believe a “mean reversion appears inevitable considering tightening consumer wallets and the potential for trade down/promo margin pressure.”