Bloomin' Brands, Inc. quarterly report, Q3 FY2017

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Bloomin’ Brands, Inc. — Q3 2017 Form 10-Q

Reporting period: Thirteen weeks ended September 24, 2017; comparisons are with the thirteen weeks ended September 25, 2016. Year-to-date figures cover 39 weeks. The company operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s, with U.S. and International reporting segments.

Financial results and position

  • Q3 revenue: $948.9 million, down 5.6% year over year. Restaurant sales were $937.9 million; franchise and other revenue rose to $11.0 million from $6.6 million.
  • Q3 earnings: Operating income was $3.2 million versus $31.7 million; operating margin fell to 0.3% from 3.2%. Net income attributable to Bloomin’ Brands was $4.3 million versus $20.7 million; diluted EPS was $0.05 versus $0.18. A $4.0 million income-tax benefit and $7.5 million of other income helped offset near break-even pre-tax income.
  • Q3 restaurant economics: Restaurant-level operating margin was 13.3%, down from 14.4%. Labor, other restaurant operating costs and impairments weighed on performance.
  • Year to date: Revenue was $3.126 billion, down 3.8%; operating income was $114.5 million versus $131.8 million. Net income attributable to the company increased to $83.9 million from $46.0 million, and diluted EPS was $0.83 versus $0.40. Adjusted diluted EPS, a non-GAAP measure, was $0.96 in both periods.
  • Cash flow: Operating cash flow was $223.0 million, essentially flat with the prior-year period. Capital expenditures were $183.8 million; operating cash flow less capital expenditures was approximately $39.2 million. Investing activities used $62.5 million, while financing activities used $196.2 million. Cash, cash equivalents and restricted cash ended at $102.4 million.
  • Debt and liquidity: Debt was $1.201 billion, net of discounts and issuance costs, including $1.180 billion under the senior secured credit facility. Cash and cash equivalents were $98.7 million; unused revolving capacity was $128.3 million after letters of credit. The company reported compliance with debt covenants and said expected liquidity was adequate for at least 12 months.
  • Working capital: Current assets of $258.7 million and current liabilities of $716.8 million produced a $458.1 million working-capital deficit. Current liabilities included $248.6 million of unearned gift-card revenue; management said negative working capital is typical for its restaurant model.
  • Capital returns: The company repurchased 13.8 million shares for $272.7 million year to date and paid $23.7 million in dividends. Shares outstanding fell to 91.2 million from 103.9 million at year-end 2016. Stockholders’ equity declined to $36.6 million from $195.4 million.

Material changes versus the prior period

  • Q3 revenue and operating income declined, reflecting refranchising, restaurant closures, lower U.S. comparable sales and weaker restaurant-level margins. Q3 comparable sales were down 1.0% in the U.S.; management estimated hurricanes reduced U.S. comparable sales by 1.0 percentage point. U.S. traffic fell 1.9%, partly offset by a 0.9% increase in average check.
  • The U.S. segment’s Q3 restaurant-level margin fell to 12.2% from 14.1%; the International margin improved to 20.7% from 18.2%. Brazil Outback comparable sales increased 4.8%.
  • Year-to-date net income and EPS improved substantially, partly because the prior-year period included a $39.6 million impairment associated with the South Korea sale and a $27.0 million debt-defeasance and extinguishment loss. Current-year results also included favorable tax items and gains on asset disposals.
  • During 2017, the company sold 54 U.S. restaurants to franchisees and sold one Carrabba’s location; it also sold 26 restaurant properties in sale-leaseback transactions for $92.5 million gross proceeds. These actions contributed to lower company-owned sales and higher franchise revenue, while sale-leasebacks increased rent expense.

Outlook, commentary and risks

  • Management estimated 2017 capital expenditures of $260 million to $280 million. It expected low-single-digit commodity-cost inflation and approximately 4% labor-cost inflation in fiscal 2018. The filing provides no clear full-year revenue or EPS guidance.
  • The company decided to close 43 underperforming U.S. restaurants and two Abbraccio restaurants in Brazil. It expected combined future cash expenditures for the 2017 Closure Initiative and Bonefish restructuring of $35.4 million to $41.8 million, primarily for lease obligations; remaining undiscounted payments extend to 2029 for the 2017 initiative.
  • Q3 included $18.6 million of impairment and restaurant-closing expense, including $9.5 million of charges related to surplus properties. Other income included an $8.4 million gain from the sale of one Carrabba’s location. Year-to-date, the company recorded $38.3 million of impairment and closing expense.
  • The senior secured credit facility matures in May 2019. The debt-maturity table shows $1.121 billion due in Year 2 from the reporting date; management said it was exploring options to address the 2019 maturity. Variable-rate debt exposes the company to interest-rate risk, partly hedged by $400 million of swaps maturing in 2019.
  • Lease guarantees tied to assigned restaurant leases could require approximately $26.9 million of undiscounted payments if primary lessees default; no liability was recorded. The company also had $3.7 million accrued for various legal matters. Management said ordinary-course legal claims were not expected to materially affect financial position or results.
  • Other stated risks include consumer demand and competition, wage and benefit increases, food and commodity costs, weather and disasters, foreign currency and international conditions, cybersecurity, and the effects of leverage and credit covenants. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Progress and financing terms for addressing the May 2019 credit-facility maturity, including the large scheduled debt payment and covenant headroom.
  • Whether U.S. comparable sales, traffic and restaurant-level margins stabilize after the Q3 declines, and the ongoing effects of wages, inflation and hurricanes.
  • Cash generation after capital spending, lease obligations, dividends and share repurchases; confirm whether the pace of buybacks remains consistent with liquidity and debt priorities.
  • Actual costs and cash timing for restaurant closures, surplus-property impairments and contingent lease guarantees.
  • The sustainability of year-to-date earnings improvement, given prior-year impairments and debt charges, current-period disposal gains, and favorable tax items; compare GAAP results with management’s non-GAAP adjustments.