Business context and reporting period
Brinker International, Inc. operates and franchises Chili’s Grill & Bar and Maggiano’s Little Italy. This Form 10-Q covers the 13 and 26 weeks ended December 26, 2012, compared with the periods ended December 28, 2011. At quarter-end, the company owned, operated or franchised 1,593 restaurants in the U.S. and 32 countries and two territories outside the U.S.
Financial performance
| Metric | 13 weeks ended Dec. 26, 2012 | 13 weeks ended Dec. 28, 2011 | 26 weeks ended Dec. 26, 2012 | 26 weeks ended Dec. 28, 2011 |
|---|---|---|---|---|
| Total revenue | $689.8 million | $681.9 million | $1,373.3 million | $1,350.3 million |
| Operating income | $61.6 million | $55.9 million | $108.1 million | $95.5 million |
| Net income | $37.2 million | $35.7 million | $65.0 million | $59.3 million |
| Diluted EPS | $0.50 | $0.44 | $0.86 | $0.72 |
| Operating margin | 8.9% | 8.2% | 7.9% | 7.1% |
| Net margin | 5.4% | 5.2% | 4.7% | 4.4% |
For the 26-week period, operating cash flow was $131.3 million, capital expenditures were $69.8 million, and cash at period-end was $93.1 million. Net cash used in investing and financing activities was $64.4 million and $32.9 million, respectively. The company estimated fiscal 2013 capital expenditures of $130–$140 million, expected to be funded entirely by operating cash flow.
At December 26, 2012, total debt was $711.6 million, including $27.5 million of current installments; long-term debt excluding current installments was $684.2 million. The revolving facility balance was $150 million, with $100 million of availability. The company reported a $168.8 million working capital deficit and said it was in compliance with all financial debt covenants. The term loan and revolver rate was LIBOR plus 1.63% based on its current credit rating. S&P rated the company BBB- with a stable outlook; Moody’s ratings were below investment grade, also with a stable outlook.
Material changes versus prior comparable periods
- Revenue rose 1.2% in the quarter and 1.7% year to date. Company-owned comparable sales increased 0.9% for the quarter and 1.8% year to date; traffic declined 2.1% and 0.9%, respectively, with pricing and favorable mix contributing to sales.
- Operating income and net income increased in both comparison periods. Year-to-date company restaurant expenses fell to 84.8% of company sales from 85.7%; cost of sales improved to 27.7% from 28.0%. Quarterly restaurant labor rose slightly as a share of company sales, to 32.5% from 32.4%.
- Year-to-date interest expense increased to $14.0 million from $13.6 million, reflecting higher borrowing balances. The effective tax rate increased to 32.0% from 29.3%, primarily due to increased earnings and the temporary expiration of employment tax credits.
- Operating cash flow increased from $114.2 million to $131.3 million, while capital expenditures rose from $53.5 million to $69.8 million. The company drew $110 million on its revolver, primarily to fund share repurchases, and repurchased about 4.0 million shares for $131.4 million.
- Diluted weighted-average shares declined to 75.6 million year to date from 82.6 million, contributing to higher EPS. The quarterly dividend increased 25%, from $0.16 to $0.20 per share.
Outlook, management commentary, risks and unusual items
Management described key economic indicators as somewhat neutral but noted soft industry sales late in the quarter and continued consumer caution. Its strategy centers on sales growth, guest experience and operating efficiency. Chili’s kitchen equipment installation was completed at company-owned restaurants, and the company reported rollout of integrated point-of-sale and back-office software across those restaurants. Management expects these initiatives, menu changes, remodels and international franchising to support longer-term sales and profitability. It also reported continued sales growth and strong margin performance at Maggiano’s.
The filing gives no formal earnings or revenue guidance. Fiscal 2013 projected openings were 32–37 restaurants, including 30–35 international franchised restaurants; management estimated capital spending of $130–$140 million. It stated that cash from operations and credit-facility availability were adequate for operations and debt obligations, and targeted a 40% dividend payout ratio.
Year-to-date other gains and charges included $0.7 million of restaurant impairment charges, $2.6 million of closure charges, and net gains of $2.4 million, primarily from land sales. The prior-year period included $2.5 million of charges related to a pending class-action settlement. Lease guarantees tied to restaurant sales and brand divestitures had a maximum potential exposure of $141.7 million; no material liability was recorded. In a California meal-period and rest-break class action, the state supreme court remanded some issues for further proceedings; the company said any loss could not be reasonably estimated and it intended to defend its position. Management said other pending legal matters were not expected to have a material adverse effect.
Risks identified include competition, cautious consumer spending and economic weakness, food and energy cost inflation or supply interruptions, labor and healthcare costs, regulation, franchisee performance, litigation, technology and data-security disruptions, and weather or other unforeseen events. The filing reported no material change in market risk disclosures or risk factors from the prior annual report.
Important facts for investors to verify
- Whether comparable-sales performance and traffic trends improved after the reported quarter, particularly at Chili’s and Maggiano’s.
- Whether kitchen equipment, software and remodel investments deliver the expected labor savings, guest response and returns on capital.
- How continued share repurchases, dividends and borrowing affect debt levels, interest expense, liquidity and credit ratings.
- Actual fiscal 2013 capital spending and restaurant openings versus the stated estimates, especially international franchised openings.
- Developments in the California litigation and any changes to lease-guarantee exposure or other contingencies.