Brinker International (EAT) Risk Analysis

Regardless of the source or cause, any report of food-borne illnesses, food contamination or other food safety issues, including allergen cross contamination at one of our restaurants or our franchisees' restaurants, whether accurate or not, could irreparably damage our brand reputations and result in declines in guest traffic and sales at our restaurants. A food safety incident at one of our restaurants or our franchisees' restaurants may subject us to regulatory actions and litigation, including criminal investigations, and we may incur significant legal costs and other liabilities. Food safety incidents may also occur in our supply chain and be out of our control. Public instances of food-borne illness, food tampering or food contamination, even if our restaurants are unaffected, could result in negative publicity about the restaurant industry in general, cause changes in consumer behavior, including reduced demand for particular menu offerings, and adversely affect our sales or cause us to incur additional costs to implement food safety protocols beyond industry standards. [This includes consumer concerns relating to pervasive chemicals such as phthalates, per- and polyfluoroalkyl substances ("PFAS"), microplastics, and heavy metals in the food supply.] The occurrence of food-borne illnesses or food safety concerns could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.

The restaurant business is highly competitive as to price, service, restaurant location, convenience, and type and quality of food. We compete within each market with locally-owned restaurants as well as national and regional restaurant chains. The casual dining segment of the restaurant industry has not seen significant growth in customer traffic in recent years. If these trends continue, our ability to grow customer traffic at our restaurants (including through off-premise) will depend on our ability to increase our market share within the casual dining segment. We also face competition from quick service and fast casual restaurants; the convergence in grocery, deli and restaurant services; and meal kit and food delivery providers. We compete primarily on the quality, variety and value perception of our menu items, as well as the quality and efficiency of service, the attractiveness of our facilities and the effectiveness of our advertising and marketing programs. A key component of our corporate strategy involves our brand value as it relates to our competition, and any failure to maintain customer perception of our brand value could negatively impact our sales. If we are unable to compete effectively, our gross sales, guest traffic and profitability may decline.

Changing health or dietary preferences and weight-management medications or treatments may cause consumers to avoid our products in favor of alternative restaurants to consume less of our products or to decrease the amount they eat at restaurants in general. The food service industry as a whole depends on consumer preferences at the local, regional, national, and international levels. New information or changes in dietary, nutritional or public-health guidelines, whether issued by government agencies, academic studies, advocacy organizations or similar groups, may cause consumers to select foods other than those that are offered by our restaurants. We may not be able to adequately predict these changes and adapt our menu offerings to keep pace with developments in current consumer preferences, which may result in reductions to the revenues generated by our Company-owned restaurants and the payments we receive from franchisees.

Multi-unit restaurant businesses can be adversely affected by negative publicity resulting from poor customer service, food quality, customer complaints, litigation, illness or health concerns or other issues stemming from one or a limited number of restaurants, regardless of whether such events have a factual basis. In particular, because our business relies heavily on Chili's, unfavorable publicity relating to one or more Chili's restaurants could have a material adverse effect on the brand, and consequently on our business, financial condition and results of operations. The use of social media by our guests or team members could increase our costs, lead to litigation or result in negative publicity that could damage our reputation. Consumers' or team members ability to immediately post opinions on social media platforms to a broad audience of consumers and other interested persons, often without filters or checks on accuracy of the content posted, may harm our performance, prospects or business, regardless of the information's accuracy. The speed at which negative publicity (whether or not accurate) can be disseminated has increased drastically due to social media. If we are unable to quickly and effectively respond to any such negative publicity, we may suffer declines in guest traffic or reputational harm which could materially impact our financial performance.

Franchisees own and operate approximately 29.0% of our system-wide restaurants. Our franchise-related revenue is not material to our total revenues; however, franchise agreements are designed to require our franchisees to maintain brand consistency. Nevertheless, the franchise relationship reduces our direct day-to-day oversight of these restaurants and may expose us to risks we would not otherwise encounter if we maintained ownership and control. Our international restaurants are substantially all franchised and our ability to grow internationally is largely dependent on the success of our franchise partners in developing and maintaining new restaurants. Our reputation and financial results may be negatively impacted by: franchisee defaults in their obligations to us; limitations on our ability to enforce franchise obligations due to bankruptcy proceedings or differences in legal remedies in international markets; franchisee failures to participate in business strategy changes due to financial constraints; franchisee failures to meet obligations to pay employees; and franchisee failures to comply with food quality and preparation, employment, and other federal, state, local, or foreign laws, rules and regulations. Additionally, our international franchisees are subject to risks not encountered by our domestic franchisees, and royalties paid to us may decrease if their businesses are negatively impacted. These risks include: - Difficulties in achieving consistency of product quality and service as compared to domestic operations;- Changes to recipes and menu offerings to meet cultural norms;- Challenges to obtain adequate and reliable supplies necessary to provide menu items and maintain food quality; and - Differences, changes or uncertainties in economic, regulatory, legal, cultural, social and political conditions.

Adverse weather conditions, natural disasters, climate change or other catastrophic events, such as terrorist acts, can adversely impact restaurant sales. Natural disasters such as earthquakes, tornadoes, hurricanes, wildfires, severe adverse weather conditions, which may occur more frequently in the future due to climate change, and pandemics, whether occurring in the United States or abroad, may negatively impact our business. These events could adversely affect consumer spending and confidence, prevent customers in the affected area from dining out, impact our ability to fulfill delivery orders, disrupt our supply chain and increase costs, cause damage to or closure of restaurants and result in other lost opportunities for our restaurants. Our receipt of proceeds under any insurance we maintain with respect to some of these risks may be denied or delayed or the proceeds may be insufficient to cover our losses fully. Moreover, we may be unable to obtain or maintain insurance in the amounts and on terms we view as appropriate and favorable for our operations.

We are subject to extensive federal, state, local and international laws and regulations, which vary from jurisdiction to jurisdiction and which increase our exposure to litigation and governmental proceedings. Among other laws and regulations, we are subject to laws and regulations relating to the design and operation of facilities, minimum wage, licensing and regulation by alcoholic beverage control, health, sanitation, safety and fire agencies, nutritional content and menu labeling, including the Affordable Care Act, which requires restaurant companies such as ours to disclose calorie information on their menus. Compliance with these laws and regulations may lead to increased costs and operational complexity, changes in sales mix and profitability, and increased exposure to governmental investigations or litigation. We cannot reliably anticipate any changes in guest behavior resulting from implementation of these laws. We are also subject to federal and state environmental regulations, and although these have not had a material negative effect on our operations, we cannot ensure this will not occur in the future. For example, regulations by the United States and other foreign governments focused on environmental matters such as climate change, greenhouse gases and water conservation could result in increased disclosure requirements or taxation or in future restrictions on or increases in costs associated with food and other restaurant supplies, transportation costs and utility costs, any of which could decrease our operating profits and/or necessitate future investments in our restaurant facilities and equipment to achieve compliance. We are subject to federal and state laws and regulations which govern the offer and sale of franchises and which may supersede the terms of franchise agreements between us and our franchisees. Failure to comply with such laws and regulations or to obtain or retain licenses or approvals to sell franchises could adversely affect us and our franchisees. Due to our international franchising, we are also subject to governmental regulations throughout the world impacting the way we do business with our international franchisees. These include antitrust and tax requirements, anti-boycott regulations, import/export/customs and other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could adversely impact our business and financial performance. The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and therefore have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state, local, and international authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. Compliance with these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.

We are subject to lawsuits, administrative proceedings and claims that arise in the regular course of business or out of special circumstances. These matters typically involve claims by guests, team members and others regarding issues such as food-borne illness, food safety, premises liability, compliance with wage and hour requirements, work-related injuries, discrimination, harassment, disability and other operational issues common to the food service industry, as well as contract disputes and intellectual property infringement matters. Our franchise activity also creates a risk of us being named as a joint employer of workers of franchisees for alleged violations of labor and wage laws. We could be adversely affected by negative publicity and litigation costs resulting from these claims, regardless of their validity. Significant legal fees and costs in complex class action litigation or an adverse judgment or settlement that is not insured or is in excess of insurance coverage could have a material adverse effect on our financial position and results of operations.

We are subject to income and other taxes in the United States and foreign jurisdictions, and our operations, plans and results are affected by tax and other initiatives around the world. In particular, we are affected by the impact of changes to tax laws or policy or related authoritative interpretations. We are also impacted by settlements of pending or any future adjustments proposed by taxing and governmental authorities inside and outside of the United States in connection with our tax audits, all of which will depend on their timing, nature and scope. Any significant increases in income tax rates, changes in income tax laws or unfavorable resolution of tax matters could have a material adverse impact on our financial results.

Companies across all industries are facing stakeholder scrutiny relating to their sustainability practices. Changing consumer preferences or new regulations may result in increased demand for additional reporting regarding our products and supply chain and their respective environmental and social impact, including on our sustainability practices. These demands could require additional transparency, due diligence, and reporting and could cause us to incur additional costs or require us to make changes to our operations to comply with such demands. Further, concern over climate change and other environmental matters has and may in the future result in new or increased legal and regulatory requirements to reduce or mitigate our impact on the environment, including greenhouse gas emissions regulations or disclosure requirements, alternative energy policies, and sustainability initiatives. At the same time, other stakeholders and regulators have increasingly expressed or pursued opposing views, legislation and investment expectations with respect to sustainability initiatives, including the enactment or proposal of "anti-ESG" legislation and policies, which may partially or wholly conflict with other stakeholder expectations or existing or future legislation, regulations or policies applicable to us. We may also determine that certain changes to our business are required in anticipation of further regulation or evolution of consumer preferences and demands. Increased focus and activism related to corporate responsibility and sustainability, from either pro- or anti-ESG stakeholders, may also result in investors reconsidering their investment decisions as a result of their or a third party's assessment of a company's sustainability practices. If we fail to achieve any goals, targets, or objectives we may set with respect to corporate responsibility matters, if we do not meet or comply with new regulations or evolving consumer, investor, industry, or stakeholder expectations and standards (which are not uniform), including those related to reporting, or if we are perceived to have not responded appropriately to stakeholder concerns regarding sustainability matters, we may face legal or regulatory actions, the imposition of fines, penalties, or other sanctions, adverse publicity, decreased demand from consumers, or a decline in the price of our common shares, any of which could materially harm our reputation or have a material adverse effect on our business, financial condition, or operating results.

We regard our Chili's and Maggiano's trademarks and other trademarks related to our restaurant businesses, as having significant value and being important to our marketing efforts. We rely on a combination of protections provided by contracts, copyrights, patents, trademarks, service marks and other common law rights, such as trade secret and unfair competition laws, to protect our restaurants and services from infringement. We have registered certain trademarks and service marks in the United States and foreign jurisdictions. However, we are aware of names and marks identical or similar to our service marks being used from time to time by other entities. Although our policy is to oppose any such infringement, further or unknown unauthorized uses or other misappropriation of our trademarks or service marks could diminish the value of our brands and adversely affect our business. In addition, effective intellectual property protection may not be available in every country in which we have or intend to open or franchise a restaurant. Although we believe we have taken appropriate measures to protect our intellectual property, there can be no assurance that these protections will be adequate and defending or enforcing our service marks and other intellectual property could result in the expenditure of significant resources.

Our technology systems contain personal, financial and other information that is entrusted to us by our guests and team members, as well as financial, proprietary and other confidential information related to our business. In addition, a significant portion of our restaurant sales are by credit or debit cards. If our technology systems, or those of third-party services providers we rely upon, are compromised as a result of a cyber-attack (including from circumvention of security systems, denial-of-service attacks, hacking, use of artificial intelligence, "phishing" attacks, computer viruses, ransomware, malware, or social engineering) or other external or internal methods, it could result in an adverse and material impact on our reputation, operations, and financial condition. The cyber risks we face range from cyber-attacks common to most industries, to attacks that target us due to the confidential consumer information we obtain through our electronic processing of credit and debit card transactions. The rapid evolution and increased adoption of artificial intelligence technologies may also heighten our cybersecurity risks by making cyber-attacks more difficult to detect, contain, and mitigate. Such security breaches could also result in litigation or governmental investigation against us, as well as the imposition of penalties. These impacts could also occur if we are perceived either to have had an attack or to have failed to properly respond to an incident. To conduct our operations, we regularly move data across national borders, and consequently are subject to a variety of continuously evolving and developing laws and regulations regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. The use and disclosure of such information is regulated and enforced at the federal, state and international levels, and these laws, rules and regulations are subject to change. As privacy and information security laws and regulations change, or cyber risks evolve pertaining to data and artificial intelligence, we may incur significant additional costs in technology, third-party services and personnel to maintain systems designed to anticipate and prevent cyber-attacks. As with many public companies, our defenses are under attack regularly. There have been, and will continue to be, minor intrusions from time-to-time. We regularly implement and monitor preventative measures to reduce cyber risks. However, we cannot provide assurance that our security frameworks and measures will be successful in preventing future significant cyber-attacks or data loss.

We rely on information systems across our operations, including, for example, point-of-sale processing in our restaurants, management of our supply chain, collection of cash, payment of obligations and various other processes and procedures. Our ability to efficiently manage our business depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with maintenance, larger scale outages, upgrading or transitioning to replacement systems or a breach in security of these systems could cause delays in customer service and reduce efficiency in our operations. Furthermore, as we continue to incorporate technology increasingly into our guests' experiences, disruptions or performance issues with guest-facing technology or systems could negatively impact the guest experience and counteract the intended benefits of such systems. Additionally, our corporate systems and processes and corporate support for our restaurant operations are handled primarily at our restaurant support center. We have disaster recovery procedures and business continuity plans in place to address most events of a crisis nature, including tornadoes and other natural disasters, and back up and off-site locations for recovery of electronic and other forms of data and information. However, if we are unable to fully implement our disaster recovery plans, we may experience delays in recovery of data, inability to perform vital corporate functions, loss of productivity, tardiness in required reporting and compliance, failures to adequately support field operations and other breakdowns in normal communication and operating procedures that could have a material adverse effect on our financial condition, results of operations and exposure to administrative and other legal claims.