What happened
Shares of Brinker International (EAT 1.43%), the parent of Chili's, were sliding today after Moody's announced it had completed a periodic review of the company's business and underscored some of the headwinds facing the casual-dining chain. The update came just six weeks after Moody's downgraded Brinker's credit rating to Ba3 and just a few days after Brinker stock had surged on a better-than-expected earnings report.
Today, the stock finished down 8.6%.
Image source: Chili's.
So what
Moody's said that Brinker benefits from "high level of brand awareness, meaningful scale, improved cost structure and strong product pipeline and technology initiatives that should help drive incremental traffic and higher check over the longer term." However, the ratings agency also explained that it had a weak liquidity rating on the company because of its expected negative free cash flow during the coronavirus pandemic, and said Brinker's rating was being reviewed for downgrade because of the coronavirus's potential to have a sustained impact on its business, including its cash position in the face of weak earnings, and the impact on consumer spending and willingness to visit restaurants.
In its earnings report last week, Brinker, which also owns Maggiano's, said that it had total liquidity of $175 million in cash and a revolving credit loan availability, and that it estimated an average of $5 million a week in cash burn, while the business is operating primarily to fulfill off-premise orders. In a worst-case scenario, where the business remains off-premise, that would give Brinker 35 weeks of liquidity.
Now what
Investors should keep on Brinker's credit rating, which has now slipped into junk status, as it will affect its interest rates should it need to borrow money to stay afloat during the crisis.
The restaurant stock popped after it beat estimates in its earnings report last week, but Moody's comments are a reminder that the company faces an uphill road ahead. Even as states start to reopen their economies, consumers may be reluctant to visit restaurants, and a recession will also weigh on consumer spending. Making a full recovery, in other words, could easily take years if the pandemic persists.
