Investing.com -- S&P Global Ratings has upgraded the rating of Dallas-based casual dining restaurant operator, Brinker International Inc (NYSE: EAT )., to ’BB+’ from ’BB-’, citing the company’s continued outperformance and successful debt reduction. The rating for its $350 million notes due 2030 has also been raised to ’BB+’, with a recovery rating of ‘4’, indicating average recovery expectations in case of a payment default.

Brinker International’s adjusted debt to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) ratio was lowered to 2.0x for the 12 months ended March 26, 2025, a significant decrease from 3.4x for the same period of the previous year. This was achieved through strong sales growth, EBITDA margin expansion, and debt reduction.

S&P Global Ratings expects the company to reduce its leverage to below 2x by the end of fiscal 2025, despite a soft industry environment. This will be facilitated by further sales growth and robust EBITDA margins. The stable outlook reflects S&P’s expectation that Brinker will maintain a conservative financial policy and leverage in the high-1x area over the next 12 months, benefiting from share gains, sales leverage, and improved execution.

Brinker’s strong operating performance and reduced leverage led to the upgrade. The company’s operating performance exceeded expectations in the first three quarters of fiscal 2025, with comparable sales increasing by 13%, 27.4%, and 28.2% in quarters one, two, and three, respectively. This growth was largely due to traffic increases at company-owned units, contrasting with a pressured restaurant industry that has seen nearly flat comparable sales growth and negative traffic over the last two quarters.

Brinker’s recent results were driven by sales leverage, fueled by simplification and efficiency initiatives that began more than two years ago. These initiatives, including labor retention and kitchen efficiency efforts, a revamped advertising campaign, and menu innovation, led to revenue growth of more than 25% and EBITDA growth of more than 75% compared to two years ago.

S&P Global Ratings expects tariffs to have a minimal impact on Brinker’s margins and overall performance. More than 80% of Brinker’s supply chain basket is sourced domestically, with the remaining 20% largely covered by the 2020 United States-Mexico-Canada Agreement. The company’s pricing strategy will allow it to absorb tariffs while maintaining its value proposition. Improved free cash flow generation, expected to reach $330 million in fiscal 2025, will provide the company with options for cash uses.

Despite the competitive nature of the industry, Brinker’s ability to sustain traffic-driven comparable sales growth offsets risks. The company’s relevance in terms of value and offerings has proven key to maintaining its competitive position. Brinker’s geographic footprint, with approximately 40% of its company-owned restaurants located in Texas, Florida, and California, is concentrated, yet its operational effectiveness offsets these risks.

S&P could lower the rating if Brinker experiences a sharp reversal in its strong execution and operating trajectory, resulting in leverage rising above 3x. Conversely, the rating could be raised if the company significantly grows its existing store base or diversifies its banner mix while maintaining consistent performance, or maintains a more conservative financial policy, including keeping S&P Global Ratings-adjusted leverage well below 2x.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.