Business context and reporting period
Brinker International, Inc. operates and franchises Chili’s Grill & Bar and Maggiano’s Little Italy. This unaudited Form 10-Q covers the 13 and 26 weeks ended December 24, 2014, the second quarter and first half of fiscal 2015. The company had 1,634 restaurants at quarter-end.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | First half FY2015 | First half FY2014 |
|---|---|---|---|---|
| Total revenue | $742.9 million | $705.7 million | $1,453.9 million | $1,390.3 million |
| Operating income | $65.5 million | $64.3 million | $119.8 million | $113.3 million |
| Net income | $41.3 million | $39.7 million | $74.0 million | $69.0 million |
| Diluted EPS | $0.64 | $0.58 | $1.13 | $1.00 |
| Operating margin | 8.8% | 9.1% | 8.2% | 8.2% |
| Net margin | 5.6% | 5.6% | 5.1% | 5.0% |
Q2 revenue grew 5.3%; operating income rose 1.8% and net income rose 3.9%. First-half revenue, operating income and net income increased 4.6%, 5.7% and 7.4%, respectively. Lower weighted-average diluted shares—64.963 million in Q2 versus 68.628 million a year earlier—contributed to EPS growth.
Q2 comparable sales were up 3.7% at company-owned restaurants and 3.5% system-wide. First-half company-owned comparable sales rose 3.0%. Management said the Christmas Day calendar shift added 1.1 percentage points to Q2 and 0.5 points to first-half comparable sales.
For the first half, operating cash flow was $162.5 million, compared with $147.3 million. Capital expenditures were $79.5 million, versus $69.7 million; cash flow after capital expenditures was approximately $83.0 million. Cash was $78.4 million at December 24, 2014.
Total debt was $929.3 million, including $163.0 million drawn on the revolving facility, compared with $860.2 million at June 25, 2014. The company reported $87 million of revolver availability at quarter-end and compliance with debt covenants. Its working-capital deficit was $225.7 million.
Changes, outlook and material items
- Company sales rose 4.9% in Q2, supported by comparable-sales growth and higher capacity. Franchise and other revenue increased 18.1%, driven by tabletop-device revenue, product royalties and higher domestic franchise royalties.
- Restaurant labor and cost of sales improved modestly as a percentage of company sales. Higher commodity prices for items including burger meat, cheese, avocados and seafood, wage increases, credit-card fees and tabletop-device costs partly offset efficiencies and sales leverage.
- Q2 other gains and charges increased to $8.3 million from $1.2 million, including a $5.8 million additional Hohnbaum litigation charge, restaurant impairments, closure costs and losses related primarily to restaurant sales in Mexico. The Hohnbaum settlement received court approval; the company expects to pay approximately $44.3 million in February 2015, subject to claim validation.
- The company repurchased $112.8 million of shares in the first half and paid $35.4 million in dividends. The quarterly dividend was raised 17% to $0.28 per share. After quarter-end it borrowed an additional $14 million and repurchased about 600,000 shares for $36.2 million.
- The company received $8.6 million in January 2015 from a Visa/Mastercard antitrust settlement; it expects to record the amount in Q3 FY2015.
- Management said available operating cash flow and credit facilities should be adequate for foreseeable operations and debt payments. It targeted a 40% dividend payout ratio and projected 51–57 restaurant openings in fiscal 2015, including 35–39 international Chili’s openings. It expected to complete the company-owned Chili’s reimage program by fiscal year-end and planned a loyalty program later in the fiscal year. The filing provides no specific earnings or revenue forecast.
- Risks highlighted include competition and challenging industry traffic, food and labor cost inflation, economic and consumer-spending changes, franchisee performance, litigation, food-supply interruptions, and technology and data-security risks. Lease guarantees had a maximum potential exposure of $108.2 million; no liability was recorded because default was considered less than probable. Undrawn standby letters of credit were $32.1 million.
- An immaterial prior-period revenue and expense classification error was corrected; it did not affect previously reported net income or balance-sheet, cash-flow or equity amounts.
Investor verification priorities
- Track whether comparable-sales gains persist after the favorable calendar effect and whether traffic remains positive.
- Monitor restaurant-level margins against commodity, wage, credit-card and tabletop-device costs.
- Verify the final Hohnbaum settlement payment and claim validation, and the Q3 recognition of the $8.6 million antitrust recovery.
- Assess debt, revolver capacity and covenant headroom as borrowing and share repurchases continue; confirm that cash generation supports capital spending and dividends.
- Compare actual restaurant openings, reimage completion and loyalty-program execution with management’s stated plans.