Brinker International, Inc. — Form 10-Q Summary
Business context and period: Brinker operates and franchises Chili’s and Maggiano’s, along with virtual brands. This report covers the 13 weeks ended September 29, 2021 (fiscal 2022 first quarter), compared with the 13 weeks ended September 23, 2020. At quarter-end, Brinker had 1,650 restaurants: 1,145 company-operated and 505 franchised.
Financial performance
- Revenue: $876.4 million, up 18.4% from $740.1 million. Company sales were $859.6 million; franchise and other revenues were $16.8 million. System-wide comparable restaurant sales increased 17.8%; company-operated comparable sales rose 17.0%.
- Profit: Operating income was $25.6 million versus $24.4 million; net income was $13.2 million versus $10.7 million. Diluted EPS was $0.28 versus $0.23. Operating margin was approximately 2.9% versus 3.3%; net margin was approximately 1.5% versus 1.4%.
- Costs and margins: Food and beverage costs were 27.2% of company sales, up 0.6 percentage points; labor was 35.5%, up 1.5 points; restaurant expenses were 26.9%, down 0.9 points. Management cited commodity inflation and supply constraints, and higher wages, training and overtime.
- Cash flow: Operating cash flow was $40.2 million, down from $82.8 million. Capital expenditures were $37.3 million. Investing cash use was $64.3 million, including $47.5 million for the 23-restaurant acquisition, partly offset by $20.5 million in sale-leaseback proceeds. Cash increased to $31.2 million from $23.9 million.
- Debt and liquidity: Debt and finance lease obligations totaled $1,026.1 million before $3.0 million of unamortized costs and discounts; the balance-sheet carrying amount, including current installments, was $1,023.1 million. The $800 million revolving facility had $548.7 million available and matures in August 2026. Brinker reported covenant compliance. Current assets were $217.3 million and current liabilities $547.2 million.
- Capital returns: The company repurchased 0.8 million shares for $39.6 million after reinstating its buyback program; approximately $265 million remained authorized. The regular quarterly cash dividend remained suspended.
Material changes and notable items
- Brinker acquired 23 previously franchised Chili’s restaurants on September 2 for a stated purchase price of $48.0 million, funded with credit-facility borrowings and sale-leaseback proceeds. Purchase accounting was preliminary.
- On October 31, after quarter-end, Brinker acquired another 36 Chili’s restaurants for $55 million, funded through its revolver.
- Maggiano’s revenue grew 65.7%, primarily reflecting stronger dining and banquet sales and delivery, including virtual brands. Chili’s revenue grew 14.7%; its comparable sales rose 13.4%.
- Other gains and charges were $4.5 million, including remodel costs, Hurricane Ida-related losses, enterprise-system implementation costs, and COVID-related charges.
Outlook, risks and contingencies
- Management said it believed operating cash flow and revolver availability were adequate for operations and near-term debt obligations. No specific earnings or revenue guidance was provided. Fiscal 2022 projected openings were 20–23 restaurants, including 8 company-operated and 12–15 franchised.
- COVID-19 effects remain uncertain, including potential changes in demand, restrictions, staffing and supply-chain conditions. All company-owned dining rooms or patios were open in some capacity at quarter-end, but Brinker reported increased employee turnover and limited material shortages and service disruptions.
- Management cited rising food commodity costs, wage pressures, and possible further competition for labor, goods and transportation. Chili’s off-premise sales were approximately 35% of company sales.
- Brinker disclosed lease guarantees or secondary liability estimated at $28.4 million and $5.9 million of undrawn standby letters of credit. In the payment-card data litigation, class certification was granted in part; appellate review was allowed. The company said the potential loss was not determinable and recorded no liability.
- The regular dividend remains suspended; Brinker planned to repay $54.5 million of deferred payroll taxes in two equal installments on December 31, 2021 and December 31, 2022.
Important facts for investors to verify
- Whether revenue growth and comparable-sales gains are sustainable as pandemic-related comparisons normalize, and how much was affected by restaurant acquisitions.
- Whether labor availability, wage inflation, food costs and supply constraints pressure restaurant-level profitability.
- Liquidity and leverage after the two franchise-to-company restaurant acquisitions, share repurchases and planned deferred-tax repayments.
- Final purchase-price allocations and performance of the acquired restaurants, including the post-quarter acquisition.
- Developments in the payment-card litigation and lease-guarantee exposures.