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Fast Food Price Hikes Keep Coming

Real Money's Jonathan Heller says Brinker International's latest results portend higher prices across the sector.

Brinker International  (EAT) - Get Brinker International, Inc. Report is stuck in a rut, and RealMoney's Jonathan Heller says the company’s sliding stock price is a cautionary tale for the entire food and drink sector.

“Whether Brinker International's preliminary first-quarter earnings release will be a cautionary tale for the sector remains to be seen, but the numbers were something to behold,” Heller wrote recently on Real Money. “Preliminary revenue of $859.6 million was off consensus by about $17 million -- not horrible in the scheme of things. However, earnings per share of 34 cents missed the 71-cent consensus by an unhealthy 37 cents.”

When revenue is close to the mark but the bottom line is not, expenses were likely higher than expected, and in this case, EAT's operating income fell from 11.6% to 10.4% versus the same quarter last year. Brinker operates Chili's and other casual dining chains.

“The latest first quarter included higher labor costs (up 150 basis points) and higher commodity costs (up 60 basis points),” Heller added. “Those increases may not sound that dramatic. However, most restaurant margins are already fairly thin -- EAT's net profit margin for 2021 was 3.9% -- so even seemingly small increases in costs can have a dramatic effect on profitability.”

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Brinker's recourse, not unexpectedly, will be to increase menu prices from 3% to 3.5% over the next year, he noted.

“Get used to that; we'll likely be seeing more of the same from other operators,” he said. “According to the Labor Department, fast food prices rose 6.7% for the 12 months ended Sept. 30.”

Price increases may not keep consumers from flocking to restaurants in the near term, though they might just not eat out as often or could be more selective, which would impact both the bottom line and valuations.

“Stay tuned, this situation is just beginning to unfold,” Heller said

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