Business Context and Reporting Period
Company: Brinker International, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 24, 2010 (Thirteen and Thirty-Nine Week Periods)
Business Overview: Brinker owns, operates, and franchises Chili's Grill & Bar, On The Border Mexican Grill & Cantina, and Maggiano's Little Italy. As of March 24, 2010, the company operated 1,704 restaurants globally. In March 2010, Brinker entered an agreement to sell the On The Border brand to an affiliate of Golden Gate Capital; consequently, On The Border results are presented as discontinued operations beginning in the third quarter of fiscal 2010.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | 13 Weeks Ended Mar 24, 2010 | 39 Weeks Ended Mar 24, 2010 |
|---|---|---|
| Revenues | $713,380 | $2,115,438 |
| Operating Income | $49,879 | $91,218 |
| Net Income | $39,998 | $74,089 |
| Diluted EPS (Net Income) | $0.39 | $0.72 |
| Cash and Cash Equivalents | $181,926 | $181,926 (Balance Sheet) |
| Operating Cash Flow (39 Weeks) | N/A | $222,594 |
| Total Debt (Current + Long-Term) | $590,174 | $590,174 (Balance Sheet) |
| Shareholders' Equity | $682,712 | $682,712 (Balance Sheet) |
Margins (39 Weeks Ended Mar 24, 2010):
- Operating Margin: 4.3%
- Net Income Margin: 3.5%
Material Changes vs. Prior Period
- Revenue Decline: Revenues for the 13-week period decreased 7.8% to $713.4 million from $774.1 million in the prior year. The 39-week period saw a 16.5% decrease to $2.12 billion. This was driven by a 4.2% decline in comparable restaurant sales (traffic declines at Chili's) and a 5.3% reduction in capacity due to restaurant closures and sales to franchisees.
- Profitability Improvement: Despite revenue declines, Net Income increased 14.3% for the quarter ($39.9M vs $35.0M) and 100.1% for the 39-week period ($74.1M vs $37.0M). This improvement is largely due to significant restructuring charges and asset impairments in the prior year (including the sale of Macaroni Grill) and reduced operating costs.
- Debt Reduction: The company repaid $140.8 million on its term loan during the 39-week period. Total long-term debt decreased from $727.4 million (June 2009) to $338.4 million (March 2010), though $250 million of the term loan is now classified as current due to its October 2010 maturity.
- Discontinued Operations: On The Border is now classified as discontinued operations. Net income from discontinued operations was $4.5 million for the quarter and $13.5 million for the 39-week period.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Strategy: Management is focusing on profitable growth, menu innovation (new Chili's menu rollout), and operational efficiency (kitchen technology investments). Domestic company-owned new restaurant development has been suspended for fiscal 2010 to preserve cash flow.
- Liquidity: The company expects to receive approximately $180 million from the sale of On The Border in the fourth quarter. Capital expenditures for fiscal 2010 are estimated at $85 million, funded by cash from operations.
- Dividends & Buybacks: The quarterly dividend was increased to $0.14 per share (27% increase). The share repurchase program was increased by $250 million to a total of $2.31 billion, though no shares were repurchased under the plan in the first three quarters of fiscal 2010.
Risks and Contingencies:
- Debt Maturity: $250 million in term loan debt matures in October 2010 and is classified as current. Refinancing is expected but subject to market conditions.
- Legal Proceedings: The company remains secondarily liable for $173.6 million in lease payments from sold restaurants. A class-action lawsuit regarding California labor laws is pending, though the company intends to defend vigorously.
- Economic Conditions: Management notes that the global economic crisis and consumer spending trends continue to negatively impact the casual dining industry.
Investor Verification Checklist
- Debt Refinancing: Verify the status of the $250 million term loan maturing in October 2010 and the terms of the expected refinancing.
- On The Border Sale: Confirm the closing date and final proceeds of the On The Border sale to OTB Acquisition LLC (expected ~$180 million).
- Comparable Sales Trends: Monitor the impact of the new Chili's menu on comparable restaurant sales, which declined 4.2% in the quarter.
- Asset Impairments: Review future quarters for additional impairment charges related to underperforming restaurants (15 restaurants impaired in Q2 2010).
- Legal Exposure: Track developments in the California labor law class-action lawsuit and potential liability from lease guarantees on sold properties.