Brinker International, Inc. — Form 10-Q Summary
Business context and reporting period. Brinker owns, operates, develops and franchises Chili’s Grill & Bar and Maggiano’s Little Italy. This filing covers the 13 weeks ended September 28, 2011 (fiscal 2012 first quarter), compared with the 13 weeks ended September 29, 2010. The company had 1,578 restaurants in the U.S. and 31 countries and two territories outside the U.S.
Key financial results
| Metric | Q1 FY2012 | Q1 FY2011 | Change / context |
|---|---|---|---|
| Revenue | $668.4 million | $654.9 million | Up 2.1% |
| Operating income | $39.6 million | $32.4 million | Operating margin 5.9%, versus 4.9% |
| Net income | $23.6 million | $21.4 million | Up about 10% |
| Diluted EPS | $0.28 | $0.21 | Weighted average diluted shares fell to 83.6 million from 101.6 million |
| Operating cash flow | $30.9 million | $(6.6) million | Improved, partly reflecting prior-year tax and transaction cash outflows |
| Capital expenditures | $27.7 million | $15.6 million | Higher spending on equipment, kitchen retrofits and restaurant reimaging |
Revenue, costs and margins
- Company-owned comparable sales rose 1.9%; system-wide comparable sales rose 2.0%. Company-owned Chili’s comparable sales increased 1.7% and Maggiano’s increased 3.5%. Traffic and pricing gains were partly offset by unfavorable mix.
- Chili’s revenue increased 1.6% to $566.9 million; Maggiano’s increased 4.4% to $85.3 million. Royalty and franchise revenue rose 5.2% to $16.2 million, with franchisee sales of approximately $389 million, up 4.5%.
- Cost of sales increased to 27.2% of revenue from 26.6%, pressured by oils, beef and produce costs. Restaurant labor improved to 32.3% from 33.2%, and restaurant expenses improved to 24.8% from 25.2%.
- General and administrative expense rose 9.2% to $32.8 million, primarily after transition service agreements with divested brands expired. The effective tax rate increased to 29.8% from 20.4%, partly because of prior-year tax benefits; excluding discrete items, it was 30.2% versus 27.9%.
Cash, debt and liquidity
- Cash and cash equivalents were $64.1 million at September 28, down from $82.0 million at June 29, 2011. Working capital was negative $168.3 million, compared with negative $184.2 million at fiscal year-end.
- Total debt, including current installments, was $589.2 million, up from $524.7 million at June 29. This included a $250 million term loan, $289.6 million of 5.75% notes and $49.6 million of capital leases.
- In August 2011, the company revised its unsecured credit facility, increasing capacity from $400 million to $500 million and extending maturity to August 2016. It had $250 million available on the revolver and reported compliance with all financial covenants. The current borrowing rate was LIBOR plus 1.63%.
- Financing cash flows included $77.8 million of treasury-stock purchases, $70.0 million of new term-loan proceeds and $12.2 million of dividends paid. The company repurchased approximately 3.2 million shares for $75.0 million during the quarter.
Material changes and management commentary
- Operating income and net income improved year over year, supported by sales growth, lower labor costs and sales leverage on restaurant expenses. Higher commodity costs and G&A partly offset those gains.
- Management cited soft employment, consumer confidence and spending, and expected market conditions to remain challenging. Initiatives include Chili’s service and food-preparation changes, kitchen technology retrofits, new restaurant information systems, menu and value offers, and restaurant remodeling.
- Management estimated fiscal 2012 capital expenditures of $155 million to $165 million, expected to be funded entirely from operating cash flow. Fiscal 2012 projected openings were 40–45 restaurants, including 37–42 international franchised restaurants; no company-owned openings were projected.
- The quarterly dividend was increased 14%, from $0.14 to $0.16 per share, effective with the August 2011 declaration. Management said it would target a 40% dividend payout ratio. Approximately $370 million remained available under share-repurchase authorizations.
- Management said operating cash flow and credit-facility availability should be adequate to fund operations and current debt obligations. No specific full-year revenue or earnings guidance was provided in the filing.
Unusual items, contingencies and risks
- Other gains and charges included a $2.5 million litigation charge, $0.7 million of lease termination charges and a $1.3 million gain on land sale. A $0.4 million write-off of deferred financing costs was also recorded following the credit-facility revision.
- Lease guarantees and secondary liabilities totaled $163.9 million at quarter-end; the company recorded no material liability for them. A California employee class-action matter was awaiting state Supreme Court review, with oral argument set for November 8, 2011; the possible loss could not be reasonably estimated. Management said other pending matters were not expected to materially affect financial condition or results.
- Key stated risks include weak consumer demand, competition, food and energy inflation, supply interruptions, regulation, franchisee performance, technology and data-security failures, and potential asset impairments. The filing reported no material change in previously disclosed risk factors or market risks.
- No impairment charges were recorded in the quarter. Management did not expect adoption of the new goodwill-impairment guidance to materially affect the financial statements. Disclosure controls were judged effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether comparable-sales and traffic gains continue, and whether commodity inflation offsets labor and operating efficiencies.
- Progress and returns on the planned $155–$165 million capital program, kitchen retrofits and Chili’s reimaging.
- Debt levels, revolver availability, covenant compliance and credit ratings, particularly given the quarter’s share repurchases and increased borrowing.
- Whether operating cash flow supports capital spending, dividends and repurchases while maintaining liquidity.
- Developments in the California labor case and exposure under the $163.9 million of lease guarantees.