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Aug 15, 2016

S3 BLACKLIGHT: Shorts Take a Big Bite Out of Brinker Intl this Week

Brinker International Inc.’s (EAT US) stock price has risen 16.5% to $54.75 since reporting strong quarterly earnings last week and is up 14.2% year to date. Brinker’s EPS grew 32% year on year to $1.24/share and its quarterly revenues increased 15% to $882 million even though same store sales in their two flagship restaurants, Chili’s and Maggiano’s, decreased by over 1.7%.

In its quarterly statement Brinker International’s disclosed a plan to increase its debt load by $250 to $300 million and use those proceeds to continue their stock buyback program. Because of this potential increased buyback capacity, the board has approved an increase in their repurchase authority to $445 million.

In response to the proposed stock buyback increase, Fitch downgraded Brinker to BB+, one notch below investment grade, and both S&P and Moody’s put the firm on their negative watch list. If either S&P or Moody’s downgrades Brinker’s bonds they will drop to junk status and not be appropriate investments for many institutional bond holders.

Short sellers reacted vigorously to the news as short interest increased by 30% in the last week to $476 million. Short interest is up 86% for the year. The S3 Crowding Indicator, a measure of the magnitude of real-time shorting activity relative to market cap and float, had three small blips in the past week signaling meaningful short activity in EAT but not yet an earnest crowded short situation. With Brinker’s stock price up to almost $55 in less than a week, shorts may be poised to enter the market looking for a short term reversal. This is corroborated by the S3 Velocity Indicator, a measure of the real-time relative change in shorting activity, where both the 7 and 30 day trend lines are moving upwards and the 90 day is starting to change its downward course and plateauing before moving upward itself.

If Brinker International continues its rally, or their debt gets further downgraded we can expect short sellers to use the abundance of cheap dry powder available and begin to crowd this trade. Short interest is $54 million away from historical highs, $530 million in July of 2015, and should easily pass that level if short activity continues at this pace.

For more information on the above analysis, please contact:

Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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