Bloomin' Brands, Inc. quarterly report, Q3 FY2015

Bloomin’ Brands, Inc. — Q3 2015 Form 10-Q

Reporting period: Thirteen and thirty-nine weeks ended September 27, 2015; unaudited. Bloomin’ Brands operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s, with U.S. and International reporting segments. It sold Roy’s in January 2015.

Financial and operating performance

Metric	Q3 2015	Q3 2014	39 weeks 2015	39 weeks 2014
Total revenue	$1,026.7 million	$1,065.5 million	$3,328.4 million	$3,334.2 million
Operating income (loss)	$38.7 million	($1.1 million)	$199.0 million	$151.3 million
Net income (loss) attributable to Bloomin’ Brands	$16.8 million	($11.4 million)	$109.6 million	$68.7 million
Diluted EPS	$0.13	($0.09)	$0.87	$0.54
Operating cash flow	Not separately reported for the quarter	$247.3 million	$159.5 million

Q3 revenue declined 3.6%; restaurant sales fell 3.7%. Drivers included foreign exchange, restaurant closures, the Roy’s sale and weaker U.S. comparable sales, partly offset by new restaurants and growth in Brazil and Korea. Thirty-nine-week revenue was nearly flat.
U.S. comparable restaurant sales fell 1.3% in Q3, mainly on lower traffic; Bonefish Grill was down 6.1% and Carrabba’s down 2.0%. International comparable sales rose 6.1% in Brazil and 6.0% in South Korea in Q3. For 39 weeks, U.S. comparable sales rose 1.6%, while South Korea fell 2.7%.
Q3 operating income improved by $39.8 million year over year, chiefly reflecting much lower impairment and closure charges, lower general and administrative costs, and improved restaurant-level economics. Q3 restaurant-level margin was 14.8% versus 13.8%; consolidated operating margin was 3.8% versus negative 0.1%.
Cost pressures persisted: food cost was 33.2% of restaurant sales, up 0.3 percentage points, and labor was 28.1%, up 0.2 points. Management cited beef and wage inflation, partly offset by cost savings, advertising efficiencies and pricing.
For the 39 weeks, net cash from operations increased to $247.3 million; capital expenditures were $166.8 million. Cash and cash equivalents were $135.6 million at period-end, down from $165.7 million at year-end 2014.

Balance sheet, debt and capital allocation

Debt outstanding was approximately $1.40 billion before unamortized discounts; the balance sheet reported $1.38 billion of long-term debt, net, plus $21.7 million current portion. Cash was $135.6 million. Debt includes a $655 million revolving-facility balance and a $461.6 million CMBS loan.
Revolver capacity was $825 million, with $140.4 million available after letters of credit. The company reported compliance with debt covenants. The CMBS loan matures in April 2017; management was evaluating repayment options, potentially including financing or sale of real estate.
Working capital was negative $212.0 million, including $236.8 million of unearned gift-card revenue. Management said restaurant cash receipts generally precede payment of current liabilities and expected liquidity sources to cover anticipated needs for the next 12 months.
The company repurchased $160.0 million of stock and paid $22.1 million in dividends during the 39 weeks. A new $100 million repurchase authorization was approved in August; $40 million remained at quarter-end. The quarterly dividend was $0.06 per share.
Management estimated 2015 capital expenditures of $225–$235 million. It expected annual cash funding of $18–$22 million for deferred compensation plans.

Outlook, risks and unusual items

No specific revenue or earnings guidance was provided. Management planned to slow Bonefish Grill development until sales improve and stated that expected liquidity was adequate for the next 12 months, subject to operating performance and cost and working-capital management.
International currency movements reduced 39-week revenue by $79.8 million and operating income by $7.3 million. Management disclosed that a 10% currency-rate change would have affected foreign-entity revenue by $41.9 million and net income by $1.8 million for the period; it did not hedge currency exposure.
Key risks cited include consumer traffic and discretionary spending, competition, food and labor cost inflation, minimum-wage changes, commodity availability, foreign exchange and political conditions, substantial leverage and variable interest rates, and the ability to sustain dividends and repurchases.
Thirty-five of 36 planned international closures had been completed. Management expected approximately $1 million of additional charges through the first half of 2016 and $5–$6 million of future cash expenditures, mainly lease liabilities, through the final lease expiration in August 2022.
The company recorded a cumulative adjustment for errors in allocating foreign-currency translation and measuring redeemable noncontrolling interests; management concluded the errors were immaterial to current and prior periods. Q3 also included a favorable payroll-tax audit contingency resolution. The IRS issued additional FICA audit adjustments in October 2015; the company reported it could not estimate a reasonably possible loss range for the described litigation.
A Nevada wage-and-hour action had been conditionally certified for notice purposes; the company said it believed the claims were without merit and was defending them. No loss range was estimable at the stage of proceedings.

Important facts for investors to verify

Whether U.S. traffic and comparable sales stabilize, particularly at Bonefish Grill and Carrabba’s, and whether cost savings can offset food and wage inflation.
Cash generation after capital expenditures, repurchases and dividends, including the significance and timing of gift-card redemptions and foreign-held cash.
Refinancing or repayment plans for the April 2017 CMBS maturity, revolving borrowings, covenant headroom and variable-rate exposure.
Progress and remaining costs of restaurant closures, and any developments in the Nevada litigation and IRS payroll-tax matters.
The effect of foreign exchange movements and the company’s plans for international operations, especially in Brazil and South Korea.