Business context and reporting period
Brinker International operates and franchises Chili’s and Maggiano’s. This 10-Q reports the 13-week third quarter and 39 weeks year to date ended March 25, 2015, compared with periods ended March 26, 2014. The filing period is fiscal 2015 Q3, rather than the “2014 Q3” stated in the request metadata.
Financial performance
- Revenue: Q3 revenue was $784.2 million, up 3.3%; company sales rose 3.0% and franchise and other revenue rose 11.9%. Year-to-date revenue was $2.238 billion, up 4.1%.
- Profit and margins: Q3 operating income increased to $103.2 million from $87.2 million, and operating margin rose to 13.2% from 11.5%. Net income rose to $65.4 million from $56.3 million; diluted EPS was $1.02 versus $0.82. Year-to-date net income was $139.5 million versus $125.2 million, with diluted EPS of $2.14 versus $1.83.
- Comparable sales: Q3 company-owned comparable sales increased 1.7%; Chili’s increased 1.9% and Maggiano’s 0.1%. System-wide comparable sales rose 2.0%. Year-to-date company-owned comparable sales increased 2.6% and system-wide sales rose 2.4%.
- Costs: Q3 cost of sales increased to 26.8% of company sales from 26.5%, reflecting mix and unfavorable commodity prices, partly offset by pricing and fryer efficiencies. Labor declined to 31.5% from 31.6%, and restaurant expenses declined to 22.8% from 23.3% of company sales.
- Cash flow: Year-to-date operating cash flow was $274.9 million, versus $277.1 million. Capital expenditures were $107.1 million, versus $114.0 million. Cash at quarter-end was $63.5 million. Operating cash flow less capital expenditures was approximately $167.8 million.
- Debt and liquidity: Debt totaled $936.3 million, including $345.8 million drawn on the revolver, compared with $860.2 million at June 25, 2014. The company replaced its former facilities with a $750 million revolver maturing in March 2020; $404.3 million remained available at quarter-end. It reported compliance with debt covenants. Cash less debt was approximately negative $872.8 million.
- Capital returns: Year-to-date share repurchases totaled $217.0 million for approximately 3.9 million shares; dividends paid were $53.2 million. The quarterly dividend increased 17% to $0.28 per share. Shareholders’ equity moved from $63.1 million to a deficit of $32.1 million, primarily amid repurchases and other capital returns.
Material changes, outlook, and risks
- Q3 results included an $8.6 million gain from the Visa/MasterCard antitrust settlement. Year-to-date other charges included restaurant impairments, closure costs, and a charge related to the sale of two company-owned restaurants in Mexico. The prior-year comparison was also affected by closure, impairment, severance, and land-sale items.
- The Hohnbaum labor class-action settlement was finalized at a payment not to exceed $56.5 million; Brinker funded $44.0 million in February against its reserve and expected no further payments. Management said other pending or threatened matters were not expected to have a material adverse effect. Lease guarantees had a maximum potential liability of $104.7 million; no liability was recorded because default was considered less than probable. Undrawn standby letters of credit were $32.1 million.
- Management cited improving consumer and employment indicators but continued sales and traffic challenges, wage pressure, and competition. It highlighted Chili’s menu, technology, and reimage initiatives and Maggiano’s expansion. Fiscal 2015 projected openings were 45–49 restaurants in total, including 12–14 company-owned and 33–35 franchised locations. No specific earnings or revenue guidance was provided.
- Management said available operating cash flow and revolver capacity were adequate for foreseeable needs and targeted a 40% dividend payout ratio. Risks include competition, consumer demand, food and labor cost inflation, supply disruption, regulation, litigation, franchise performance, and technology and data-security issues. The company reported no material change in market risks and no material change in previously disclosed risk factors.
- Subsequent to quarter-end, Brinker borrowed an additional $30 million and repurchased approximately 926,000 shares for $56.2 million.
Key facts for investors to verify
- Comparable-sales trends and the contribution of pricing, traffic, mix, and restaurant capacity, especially whether traffic improves.
- Commodity and wage cost trends and their effect on restaurant-level margins.
- Debt, borrowing costs, covenant headroom, and the pace of buybacks relative to cash generation and liquidity.
- Execution and returns from restaurant openings, technology investments, and Chili’s and Maggiano’s initiatives.
- Final cash-flow and earnings effects of litigation and other unusual items; confirm the request’s period label against the filing’s actual fiscal 2015 Q3 period.