Brinker International, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the 13 weeks ended September 25, 2019; comparable period ended September 26, 2018. Amounts are in millions except per-share data. The company operates Chili’s and Maggiano’s.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Total revenue | $786.0 | $753.8 |
| Operating income | $31.2 | $46.9 |
| Operating margin | 4.0% | 6.2% |
| Net income | $14.9 | $26.4 |
| Diluted EPS | $0.39 | $0.64 |
| Cash from operations | $86.6 | $49.6 |
| Capital expenditures | $20.5 | $31.2 |
- Revenue increased 4.3%. Company sales rose to $763.9 from $728.3, while franchise and other revenue fell to $22.1 from $25.5. Revenue included $15.3 from three weeks of operations at 116 acquired Chili’s restaurants.
- System-wide comparable restaurant sales increased 1.6%; Chili’s domestic comparables increased 2.3%, while Maggiano’s declined 1.8%. Chili’s U.S. off-premise sales grew 29.5% and represented 14.8% of U.S. Chili’s sales.
- Company restaurant expenses were 89.0% of revenue versus 88.9% of company sales in the prior period. Cost of sales rose to 26.7% of company sales from 26.4%; restaurant labor remained 35.2%.
- Operating income and net income declined substantially. The prior-year quarter included a $13.3 net sale-leaseback gain in other gains and charges; the current quarter recorded a net $0.9 gain in that line. Current-quarter G&A also increased $4.2, including higher stock-based compensation.
- The effective tax rate was 11.3%, down from 17.9%, primarily because the prior-year rate reflected sale-leaseback gains. The FICA tax credit benefited both periods.
- Operating cash flow increased $37.0, mainly due to timing of tax refunds and payments, prepaid rent and other contractual prepayments, and other operational payments. Cash at quarter-end was $29.0, versus $13.4 at fiscal year-end.
Debt, liquidity and balance sheet
- At September 25, 2019, revolving-credit borrowings were $595.3; the company reported $404.7 available under its $1.0 billion revolver. Long-term debt and finance leases, less current installments, were $1,313.8. The company was in compliance with its financial covenants.
- Current assets were $173.7 and current liabilities were $516.4. Management said operating cash flow and revolver availability were adequate to fund operations and current debt obligations.
- Adoption of lease accounting standard ASC 842 added $1,192.3 of operating lease assets and $1,308.3 of operating lease liabilities at quarter-end. Total lease liabilities, including finance leases, were $1,392.1. The accounting change materially increased reported assets and liabilities; prior-year figures were not restated.
- Shareholders’ deficit was $585.1. The $195.9 increase to retained earnings on ASC 842 adoption was a cumulative accounting adjustment, not operating income.
Material developments, outlook and risks
- On September 5, 2019, Brinker acquired 116 Midwest franchised Chili’s restaurants for a stated purchase price of $99.0, funded with revolver borrowings. The restaurants generated $15.3 of revenue during the three weeks owned. Brinker estimated approximately $300.0 of annualized revenue, partly offset by about $22.0 of annualized royalty and advertising revenue no longer received. Purchase-price allocation was preliminary.
- Fiscal 2020 projected openings were 39–46 restaurants: 9–11 company-owned domestic Chili’s and 30–35 franchised restaurants, including 27–32 international Chili’s. This is unit-opening guidance, not earnings guidance; the filing provides no clear full-year earnings or revenue forecast.
- Management highlighted value offers, digital engagement and delivery. DoorDash delivery represented approximately 3.1% of U.S. Chili’s sales; the company planned to extend ordering through its app and website during the second quarter. Chili’s online sales rose approximately 72.6% year over year.
- Subsequent to quarter-end, Brinker drew $41.0 net on the revolver and declared a $0.38-per-share dividend payable December 26, 2019.
- Risks include commodity and labor-cost pressure, consumer demand and competition, delivery-partner dependence, data security, litigation, franchisee performance, and adverse economic or operating conditions. The filing reported no material change to previously disclosed risk factors.
- Cybersecurity class-action litigation remained pending. Brinker had not accrued a liability because the loss was not determinable; it cautioned that future legal and professional costs, payment-card claims, fines or settlements could be material. The company also had $41.2 of maximum potential liability under lease guarantees and $27.2 of undrawn standby letters of credit.
Investor verification priorities
- Track comparable sales, traffic and margins separately from sales added by the acquired restaurants.
- Verify integration results, final purchase-price allocation and whether anticipated acquisition revenue offsets lost franchise royalties and advertising revenue.
- Assess cash generation and revolver usage alongside debt maturities, interest costs and the substantial operating-lease commitments.
- Monitor food, labor, rent and delivery costs, and whether digital and off-premise growth translates into improved profitability.
- Follow developments in the cybersecurity litigation and any related insurance recovery, claims or loss accruals.