Bloomin’ Brands, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 25, 2016. This is an annual filing; it also reports fourth-quarter results. Bloomin’ Brands operated Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s, with 1,276 company-owned and 240 franchised restaurants at year-end.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $4.252 billion | $4.378 billion |
| Operating income | $127.6 million | $230.9 million |
| Operating margin | 3.0% | 5.3% |
| Net income attributable to Bloomin’ Brands | $41.7 million | $127.3 million |
| Diluted EPS | $0.37 | $1.01 |
| Cash from operations | $340.6 million | $397.4 million |
| Capital expenditures | $270.2 million | $210.3 million |
| Total debt, net | $1.089 billion | $1.317 billion |
Restaurant-level operating margin was 15.8%, down from 16.5%. U.S. comparable sales fell 1.9%, with traffic down 4.7%; Brazil comparable sales rose 6.7%. FY2016 fourth-quarter revenue was $1.004 billion, with an operating loss of $4.1 million, net loss attributable to the company of $4.3 million and diluted loss per share of $0.04.
Year-end cash and equivalents were $127.2 million; unused revolving-credit capacity was $175.2 million, net of letters of credit. Working capital was negative $432.9 million, including $388.5 million of unearned revenue, mainly gift cards and loyalty rewards. Management said available liquidity was adequate for the next 12 months, subject to operating performance and cost management. Operating leases represented $1.649 billion of future minimum payments.
Material changes versus FY2015
- Revenue declined 2.9%, reflecting the South Korea sale, weaker U.S. comparable sales, currency translation and restaurant closures, partly offset by new openings.
- Operating income fell by $103.3 million. Impairment and restaurant-closing charges rose to $104.6 million from $36.7 million; higher labor and operating costs also pressured margins.
- Net income attributable to the company decreased to $41.7 million from $127.3 million. FY2016 included a $27.0 million debt defeasance, extinguishment and modification loss and substantial impairment charges.
- Operating cash flow decreased by $56.8 million, while capital expenditures increased. Investing cash flow was positive mainly because of property sale-leasebacks and the South Korea sale.
- The company repurchased $309.9 million of shares and paid $31.4 million in dividends. Shares outstanding declined to 103.9 million from 119.2 million.
Outlook, management commentary and significant items
- Management expected comparable sales to remain pressured in 2017 amid competition, discounting, delivery services and challenging casual-dining conditions.
- Plans called for 40–50 system-wide restaurant openings in 2017, mostly internationally; capital expenditures were estimated at $260–$280 million. Management expected 2017 commodity costs to be flat to 1.0% lower than 2016 and approximately $3 million of incremental restaurant-manager salary expense.
- On February 15, 2017, the company announced a plan to close 43 underperforming restaurants, with most closures expected in 2017. It had recognized $46.5 million of related FY2016 impairments and expected further initiative charges.
- The July 2016 sale of 72 South Korean restaurants generated $50 million in cash; the locations became franchised. The company recorded a $39.6 million impairment related to the sale.
- Sale-leaseback transactions involving 159 restaurant properties generated $560.4 million gross proceeds in 2016. The transactions reduced owned property and increased lease exposure; $322.3 million was applied to the PRP Mortgage Loan.
- Debt included $1.0 billion of variable-rate borrowings under the senior secured facility, which matures in May 2019. A $400 million interest-rate swap hedged part of the exposure. The company was covenant-compliant at year-end and said it was exploring options for the 2019 maturity.
- Other key risks include wage and benefit inflation, commodity and labor costs, food safety and brand reputation, competition, foreign-exchange exposure, reliance on a limited number of beef suppliers, cybersecurity, litigation, and substantial debt and lease obligations. A tentative $2.4 million settlement was accrued in a manager overtime matter; other ordinary-course claims were also disclosed.
Important facts for investors to verify
- Whether U.S. traffic and comparable sales stabilize, and whether menu, marketing and off-premise initiatives improve results.
- Actual closure costs and savings from the 43-restaurant initiative and Bonefish restructuring.
- Progress refinancing or addressing the May 2019 senior secured debt maturity, covenant headroom and variable-rate exposure.
- The effect of sale-leasebacks on recurring rent expense, cash generation and long-term lease commitments.
- Delivery of the 2017 opening and capital-spending plans, particularly international expansion and Brazil performance.
- Potential outcomes of labor, tax and other legal matters, and the assumptions underlying impairment charges and non-GAAP adjusted results. FY2016 adjusted net income was $147.2 million and adjusted diluted EPS was $1.29; these are non-GAAP measures and differ materially from reported GAAP results.