Jacob Sonenshine

Shares of Chili's owner Brinker International are on a tear in 2025 in the face of a broad market drop. Its fiscal-third-quarter earnings report Tuesday could make or break the stock.

Brinker has a $6.9 billion market value, and shares are up 20% this year to $159, a remarkable feat, given that many restaurant stocks in the red this year -- and most small-capitalization stocks are down. The S&P 500 has slipped about 7% year to date. Tariffs have already dented consumer's confidence, and investors are concerned about a potential recession.

But sales trends at Brinkers, which also owns the smaller Maggiano's Little Italy chain, have looked so strong that the stock has pushed through the worries. Analysts have lifted this year's sales estimate to $5.37 billion from $5.32 billion at the start of the year, driven by an increase in same-store-sales growth forecasts to 12.7% from 6%. The bulk of the upward revisions came in late January after the company easily beat second-quarter-earnings expectations, something it has done in the majority of the past 20 quarters, according to FactSet. Growth in the quarter came mostly on the back of growing traffic to restaurant locations. Brinker made a choice to lean into consumer angst over higher fast-food prices, and the bet has paid off.

Analysts have lifted earnings forecasts by 46% this year, as the increased revenue is more than enough to bring expected profit margins higher.

The upbeat backdrop is precisely why Brinker stock is up this year. Shares aren't up nearly as much as earnings estimates because, like most stocks, the forward price/earnings multiple has fallen. The market has to weigh the possibility that demand and earnings growth can't be sustained.

Brinker's situation is different from most companies, which haven't seen increased earnings estimates, so for them, a lower P/E multiple means the stock price has come down. But Brinker's lower P/E multiple hasn't put the stock into the red because of its rising earnings estimates.

Now, Brinker stock is at a crossroads. After the company's last earnings report, shares topped out at $167. Every time Brinker stock nears that level, it drops. It's still above the $154 close ahead of the earnings release; buyers are still coming in at that price because, clearly, the business is worth at least that much, but sellers come in to take profits before it hits $167 because there's still some uncertainty about how Chili's will continue to fare, given the macro climate.

The reality is that weakening consumer spending will slow down growth for everyone, even if Brinker grows faster than other restaurant companies. Evidence of worsening consumer activity hasn't shown up yet because the first few months of the year came before tariff announcements, and encapsulated only the "soft data," such as consumer sentiment. That gives Wall Street reason to worry about spending. Soon, "hard data," such as retail sales and companies' earnings reports, will reveal the extent to which consumers are pulling back.

In addition, the law of large numbers is in play. Yes, Brinker is expected to continue to grow this year, and, yes, analysts forecast fairly high growth next year, but that will likely decelerate. Analysts forecast same-store sales growth of 5.2% in 2026 for Brinker, and total revenue growth of 5% to $5.63 billion. While the company is still increasing traffic, there's a limit to the number of new customers it can attract in the U.S., where it does most of its business.

That puts earnings for the fiscal third quarter, ended in March, in focus. Analysts expect earnings per share of $2.57 on sales of $1.38 billion. At the very least, Brinker needs to continue its streak of beating top- and bottom-line estimates.

More important, the market needs to see commentary from management that maintains current forecasts for the rest of this year. Many companies have provided opaque commentary for guidance because of the demand uncertainty. If Brinker does the same, the stock may sink after earnings.

The good news is that evidence suggests management will provide sturdy guidance. Evercore analyst David Palmer writes that, historically, revenue per restaurant location drops 1% on average from the fiscal third quarter to the fourth. Right now, analysts project that revenue -- which is largely driven by per-store sales -- will drop 2% in the fourth quarter to $1.35 billion from the third quarter. A quarter-over-quarter drop that's more in line with history suggests Brinker could guide for fourth quarter sales that's a few million dollars above current estimates. It wouldn't be surprising, given that the company has recently posted better sales than Wall Street has anticipated.

"Multi-year same-store-sales analysis points to meaningful upside to guidance -- and our model -- if momentum sustains," writes Palmer. He rates Brinker stock at In Line, but his $180 price target suggests 13% upside.

So if the quarter looks fine and the guidance is strong, Brinker stock should gain.

That's supported by the fact that shares now trades at 16.7 times expected earnings for the coming 12 months, down from 21 times at the start of the year, and only about 3 points above the S&P Small Cap 600 index. At the start of the year, Brinker traded at almost 7 points above the index. Assuming the stock multiple is unlikely to fall much further, any boost to current earnings expectations would lift the stock.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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April 25, 2025 12:46 ET (16:46 GMT)

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