Resilient Traffic, Operating Efficiencies Help Brinker's 4Q; Shares Remain Under Review

In contrast to a number of other casual dining participants, Brinker International EAT posted solid fourth-quarter results, including same-store sales trends that are coming in ahead of industry averages for both core brands, while also driving impressive expense leverage. While we harbor concerns that the restaurant industry will become an increasingly challenging space in which to operate in the months to come, including the threat of uneven global consumer spending patterns, increased competition due to a higher number of new restaurant openings, and the looming specter of higher commodity costs, we believe Brinker has laid out sensible plans to maintain current same-store transaction growth and preserve profitability in fiscal 2013. Nevertheless, we remain concerned that the aforementioned headwinds could spark a correction among valuations across much of the restaurant category, including Brinker, especially as slowing industry traffic and food costs are factored into forward valuation assumptions. Our fair value estimate remains under review, as we weigh the near-term industry headwinds with management's long-term goals.