Bloomin’ Brands, Inc. — Fiscal 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Fiscal 2017 included 53 weeks, versus 52 weeks in 2016; the additional week contributed approximately $80.4 million of revenue and $0.11 of diluted EPS. The filing also provides unaudited fourth-quarter results.
Business context
The company operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar. At year-end it had 1,199 company-owned and 290 franchised restaurants across the U.S. and international markets. The business is reported in U.S. and International segments.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $4.213 billion | $4.252 billion |
| Income from operations | $146.1 million | $127.6 million |
| Net income attributable to Bloomin’ Brands | $100.2 million | $41.7 million |
| Diluted EPS | $1.01 | $0.37 |
| Operating margin | 3.5% | 3.0% |
| Cash provided by operating activities | $409.0 million | $340.6 million |
| Capital expenditures | $260.6 million | $260.6 million |
| Net debt | $1.118 billion | $1.089 billion |
Revenue declined 0.9%, principally because of domestic and international refranchising and restaurant closures; the extra fiscal week, higher comparable sales and favorable foreign currency translation partly offset the decline. GAAP operating income and net income improved, helped by lower impairment charges, the extra week, higher franchise revenue and a $13.3 million increase in other income, primarily gains on restaurant sales. The effective tax rate was 13.5%, compared with 18.0%.
Restaurant-level operating margin was 15.7%, compared with 15.8%. Cost of sales improved to 31.6% of restaurant sales from 32.1%, while labor and related costs rose to 29.3% from 28.7%. Adjusted income from operations was $214.4 million versus $236.8 million; adjusted diluted EPS was $1.36 versus $1.25. These are non-GAAP measures and exclude specified charges and other items.
Fourth quarter: Revenue was $1.088 billion versus $1.004 billion; operating income was $31.6 million versus a $4.1 million loss; net income attributable to Bloomin’ Brands was $16.4 million versus a $4.3 million loss; diluted EPS was $0.17 versus a $0.04 loss. The 2017 quarter included the extra week and $25.7 million of impairment, closure and severance expenses.
Liquidity, debt and capital allocation
Year-end cash and cash equivalents were $128.3 million. The company had $377.3 million of available revolving-credit capacity, net of letters of credit. Current liabilities exceeded current assets by $500.7 million; this included $378.2 million of unearned gift-card and loyalty-program revenue, and management said negative working capital is typical for its operating model. Operating cash flow less capital expenditures was approximately $148.4 million.
Total debt, net, was $1.118 billion. A November 2017 refinancing established a $500 million term loan and a $1 billion revolving facility, maturing in November 2022; $600 million was drawn on the revolver at year-end. The debt was variable-rate, with $400 million hedged by interest-rate swaps through May 2019. The company reported compliance with debt covenants and $1.698 billion of undiscounted operating lease payments. It repurchased $272.7 million of shares and paid $31.0 million in dividends during 2017.
Changes, outlook and risks
- Comparable sales improved: combined U.S. comparable sales rose 0.5%, after declining 1.9% in 2016; Brazil Outback comparable sales rose 6.3%. U.S. traffic nevertheless declined 1.3%.
- The company refranchised 54 U.S. restaurants and sold one additional location, receiving $46.1 million net and recording a $15.8 million aggregate net gain. It also sold 31 restaurant properties in sale-leaseback transactions for $108.0 million gross proceeds.
- Management closed or planned to close 43 underperforming U.S. restaurants and two Abbraccio restaurants in Brazil. The filing estimates $31.9 million to $38.7 million of future undiscounted cash expenditures for the 2017 closure initiative and Bonefish restructuring, mainly lease obligations.
- Management expected casual-dining pressures—including competition, discounting and growth in prepared meals and delivery—to continue in 2018. It forecast commodity-cost inflation of 3.0%–3.5%, labor-cost inflation of approximately 4.0%, capital expenditures of approximately $200 million, and approximately 20 new system-wide locations. The estimated 2018 effective tax rate was 9%–10%.
- The Tax Act produced a provisional $1.9 million net tax expense in 2017; the company was still evaluating its effects and expected a favorable impact on its tax rate and GAAP net income in 2018 and later periods.
- Key risks include wage and commodity inflation, restaurant competition and traffic trends, food safety and brand reputation, reliance on a limited number of beef suppliers, foreign exchange exposure (especially Brazil), cyber incidents, lease commitments, and substantial variable-rate debt. Management identified no goodwill impairment risk in its annual test, but noted future impairments remain possible if operating conditions deteriorate.
Investor verification priorities
- Separate the 53rd-week contribution and refranchising effects from underlying comparable-sales and earnings trends.
- Review adjusted results against GAAP results, including the $68.3 million of operating-income adjustments and the $52.3 million GAAP impairment and restaurant-closing provision.
- Assess whether higher wages, commodity costs and weaker U.S. traffic can be offset by pricing, productivity and menu initiatives.
- Verify debt-covenant headroom, refinancing terms, variable-rate exposure and the company’s ability to fund debt service, lease obligations, capital spending and shareholder returns.
- Track closure-related cash costs, lease guarantees, the Tax Act’s final accounting effects, and the implementation effects of revenue-recognition and lease-accounting standards.