Brinker International, Inc. — Form 10-Q Summary
Business context and reporting period
Brinker operates and franchises Chili’s and Maggiano’s, as well as virtual brands. This report covers the 13 weeks ended September 28, 2022 (first quarter of fiscal 2023); comparisons are with the 13 weeks ended September 29, 2021. At quarter-end, the company had 1,645 restaurants: 1,182 company-operated and 463 franchised.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Total revenue | $955.5 million | $876.4 million |
| Operating income (loss) | ($19.8) million | $25.6 million |
| Net income (loss) | ($30.2) million | $13.2 million |
| Diluted earnings (loss) per share | ($0.69) | $0.28 |
| Operating margin | (2.1)% | 2.9% |
| Operating cash flow | $24.6 million | $40.2 million |
| Capital expenditures | $46.7 million | $37.3 million |
Revenue rose 9.0%. Company sales increased $80.5 million, while franchise revenue declined $1.4 million. Comparable sales increased 5.5% system-wide: Chili’s company-owned comparable sales rose 3.8%, with 7.4% price impact and 6.6% lower traffic; Maggiano’s comparable sales rose 18.2%, including 9.3% traffic growth. Prior-year acquisitions of 68 Chili’s restaurants contributed $33.7 million to the revenue increase.
Food and beverage costs rose to 30.7% of company sales from 27.1%, reflecting commodity inflation and supply constraints. Restaurant labor improved slightly to 34.9% from 35.2%, but restaurant expenses increased to 28.4% from 26.7%. The filing attributes cost pressure to inflation, higher delivery fees, utilities, repairs and maintenance, among other items.
At September 28, 2022, cash was $19.5 million and current assets were $209.8 million versus current liabilities of $573.6 million. Total debt and finance leases were $1,040.8 million, including $306.3 million drawn on the revolving facility; $493.7 million of revolving capacity remained available. The company reported $1,020.8 million of long-term debt and finance leases, net of current installments. Shareholders’ deficit was $296.6 million.
Material changes and notable items
- The company swung from prior-year profit to a quarterly loss as operating costs increased faster than revenue. Operating results included $5.0 million of other gains and charges, versus $4.5 million a year earlier.
- Net cash from operations declined by $15.6 million year over year, primarily due to lower net income and timing of receipts and payments. Investing cash outflow was $45.6 million; financing provided $27.0 million, including $35.0 million of net revolving-credit borrowings.
- Restaurant openings totaled three during the quarter, all franchised. Management projected 34–39 total openings for fiscal 2023, including 17 company-owned and 17–22 franchised locations.
- The quarterly cash dividend remained suspended. The $2.0 million of shares repurchased represented team-member share withholding, not open-market purchases under the public program. Approximately $204.0 million remained available under repurchase authorizations.
Outlook, risks and contingencies
Management provided no specific earnings or revenue guidance in this filing. It said cash, expected operating cash flow and available credit should be adequate for operations and repayment of current debt obligations within the next year. Management expected covenant compliance through the remainder of fiscal 2023. The $300 million 3.875% notes mature in May 2023; the company classified them as long-term based on its intent and ability to refinance through the revolving facility.
Management said inflation materially affected first-quarter operations and warned that higher commodity and labor costs may not be fully offset by menu pricing without harming demand. It also cited continuing risks from supply-chain and labor shortages, COVID-19-related disruption, consumer demand, competition and reliance on technology and third-party delivery.
Lease guarantees and secondary lease obligations had a maximum known potential liability of $24.6 million; $2.0 million was accrued for estimated exposure to defaults. The company also disclosed a customer-data class action arising from a 2018 malware incident: claimed damages exceed $5.0 million, but the loss range was not determinable and no liability was recorded. Management stated that other pending or threatened legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether menu pricing, sales mix and traffic can offset continuing food, labor and operating-cost inflation.
- Progress toward restoring operating profitability and cash generation after the quarterly loss and lower operating cash flow.
- Refinancing plans and costs for the $300 million notes due May 2023, along with revolving-credit availability and covenant headroom.
- Execution of the fiscal 2023 restaurant-opening outlook and the performance contribution from acquired Chili’s locations.
- Developments in the cyber litigation and lease-guarantee exposures; the filing does not establish a determinable loss for the litigation.