Brinker International, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2016, ended March 23, 2016; comparable periods ended March 25, 2015. Although the request metadata says 2015 Q3, the filing covers fiscal 2016 Q3.
Business context and results
Brinker owns, operates and franchises Chili’s Grill & Bar and Maggiano’s Little Italy. At quarter-end, it had 1,647 restaurants. Fiscal 2016 results include 103 Chili’s restaurants acquired from franchisee Pepper Dining on June 25, 2015.
| Metric | Q3 FY2016 | Q3 FY2015 | 39 weeks FY2016 | 39 weeks FY2015 |
|---|---|---|---|---|
| Total revenue | $824.6 million | $784.2 million | $2,375.8 million | $2,238.1 million |
| Operating income | $86.3 million | $103.2 million | $218.1 million | $223.0 million |
| Operating margin | 10.5% | 13.2% | 9.2% | 10.0% |
| Net income | $57.5 million | $65.4 million | $138.4 million | $139.5 million |
| Diluted EPS | $1.00 | $1.02 | $2.33 | $2.14 |
Quarterly revenue rose 5.2%, driven by acquired restaurant capacity, while company-owned comparable sales fell 3.6% and system-wide comparable sales fell 3.1%. Chili’s company-owned comparable sales declined 4.1% in the quarter, including a 4.9% traffic decline; Maggiano’s comparable sales increased 0.2%. For the 39-week period, company-owned comparable sales decreased 2.7% and system-wide comparable sales decreased 1.8%.
Costs, cash flow, debt and liquidity
- Q3 company restaurant expenses were 82.6% of company sales, versus 81.1% a year earlier. Labor rose to 32.6% from 31.5%, reflecting wage and health-care costs and sales deleverage. Cost of sales edged down to 26.7% from 26.8%.
- For the first 39 weeks, operating cash flow was $299.6 million, versus $274.9 million. Capital expenditures were $76.1 million; operating cash flow less capital expenditures was approximately $223.5 million. Investing cash outflow totaled $177.4 million, including $105.6 million for the acquisition.
- Cash was $69.0 million at March 23, 2016. Total debt was $1.178 billion, up from $974.3 million at June 24, 2015; revolving-credit borrowings were $590.3 million. Revolver availability was $159.8 million. The company reported compliance with debt covenants.
- Current liabilities of $422.3 million exceeded current assets of $196.7 million. Shareholders’ deficit was $243.7 million.
- The company repurchased approximately 5.4 million shares for $266.2 million and paid $56.2 million in dividends during the first 39 weeks. The quarterly dividend increased 14%, from $0.28 to $0.32 per share.
Material changes and unusual items
Fiscal 2016 revenue growth primarily reflects the acquired Pepper Dining restaurants and higher capacity, while comparable sales weakened. The acquisition added $65.4 million of revenue in Q3 and $189.4 million year to date; it was funded in part with revolver borrowings. Franchise and other revenue declined 13.3% in Q3, mainly because acquisition of franchised units reduced royalty revenue.
Q3 other gains and charges were a net expense of $3.9 million, including $3.4 million of impairment charges for two restaurants identified for closure and a $1.0 million investment impairment. The prior-year quarter included an $8.6 million Visa/MasterCard settlement benefit. Year-to-date fiscal 2016 items also included a $2.9 million property-sale gain, $2.4 million severance, and expenses related to a bankrupt franchisee. The effective tax rate was 26.4% for Q3 versus 32.1%, largely due to state tax benefits and resolution of tax positions.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management projected 46–55 restaurant openings in fiscal 2016, including 13–15 company-owned and 33–40 franchised locations.
- Management said operating cash flow and available credit were adequate to fund operations and current debt obligations for the foreseeable future. It cited intense competition, discounting, weak comparable sales, slow wage growth and consumer spending pressures.
- Management plans to launch Plenti rewards integration and expanded online ordering in early fiscal 2017. It described menu, digital guest-experience and operational initiatives as drivers of sales and traffic.
- Potential maximum exposure under outstanding lease guarantees was $78.8 million; no material liability was recorded. Standby letters of credit totaled $25.3 million. Management stated that pending or threatened legal matters were not expected to have a material adverse effect.
- Two underperforming restaurants were identified for closure. Subsequent to quarter-end, the company repaid $20.0 million on its revolver and repurchased approximately 67,000 shares for $3.0 million.
Important facts for investors to verify
- Whether comparable-sales and traffic trends improve, particularly at Chili’s, and how much reported growth depends on acquired capacity.
- Whether labor, restaurant expense and sales deleverage continue to pressure operating margins.
- How debt, share repurchases and dividends affect liquidity, leverage and investment-grade ratings; verify revolver availability and covenant headroom.
- Whether acquisition integration delivers expected sales and returns, including the trade-off between owned restaurant revenue and foregone franchise royalties.
- Progress on restaurant closures, impairments, legal matters and lease guarantees, as well as the expected impact of upcoming accounting standards.