Brinker International, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended September 26, 2018, the first quarter of fiscal 2019. The filing compares results with the thirteen weeks ended September 27, 2017. Brinker operates and franchises Chili’s and Maggiano’s; at quarter-end it had 1,686 restaurants, including 997 company-owned and 689 franchised locations.
Financial performance
Amounts in USD millions, except per-share data and percentages.
| Metric | Q1 FY2019 | Prior-year quarter | Change / context |
|---|---|---|---|
| Total revenue | $753.8 | $739.4 | Up 1.9%; includes ASC 606 presentation changes |
| Company sales | $728.3 | $716.9 | Up 1.6% |
| Operating income | $46.9 | $28.6 | Operating margin 6.2%, versus 3.9% |
| Net income | $26.4 | $9.9 | Net margin 3.5%, versus 1.3% |
| Diluted EPS | $0.64 | $0.20 | Weighted-average diluted shares fell to 41.1 million from 48.7 million |
| Operating cash flow | $49.6 | $50.2 | Capital expenditures were $31.2; simple CFO less capex was $18.4 |
| Interest expense | $15.6 | $13.9 | Higher average borrowing balances and revolver rates |
Cost pressures included restaurant expenses rising to 27.3% of company sales from 26.2%, and labor to 35.2% from 35.0%. Cost of sales rose to 26.4% from 26.2%. The effective tax rate was 17.9%, down from 34.8%, mainly reflecting the Tax Act and higher FICA tax credits.
Liquidity, debt and capital returns
- Cash was $11.0 at quarter-end. Total debt, net of issuance costs and discounts, was $1,160.4, including $475.3 outstanding on the revolving credit facility. Revolver availability was $524.7; the company reported compliance with its financial covenants.
- Debt declined from $1,506.7 at June 27, 2018, primarily after sale-leaseback proceeds were used to repay revolver borrowings. Subsequent to quarter-end, Brinker drew net $121.0 on the revolver.
- Operating cash flow was nearly flat year over year. Investing cash flow was $418.5, driven by $447.6 of net sale-leaseback proceeds; financing cash use was $468.0, including $105.5 of share repurchases and $16.2 of dividends.
- Shareholders’ deficit was $815.9. Brinker repurchased about 2.1 million shares for $105.5 and had $259.8 remaining under repurchase authorizations. The quarterly dividend was $0.38 per share.
Material changes and unusual items
- Brinker adopted ASC 606 using the modified retrospective method. Advertising contributions from franchisees are now reported gross as revenue rather than netted against restaurant expenses; franchise/development fees and gift-card breakage also have revised recognition timing. Management said the timing changes did not significantly affect Q1 results, but presentation affects period comparisons. Under prior GAAP, Q1 FY2019 revenue would have been $749.0 and net income $26.6.
- The company completed sale-leaseback transactions for 141 restaurant properties for $455.7 gross consideration and $447.6 net cash proceeds. It recorded a $289.1 total gain, of which $20.1 was recognized in the quarter; $269.0 remained deferred. The leases have initial 15-year terms with renewal options. The transactions reduced owned real estate and increased ongoing lease costs.
- Reported operating income benefited from the sale-leaseback gain and comparison with prior-year charges, including $7.2 of restaurant impairment and hurricane-related costs. The quarter also included $1.7 of restaurant closure charges and $0.4 of cyber-incident professional fees.
- Operating leases had approximately $1,020.4 of undiscounted remaining rental payments. Brinker expects adoption of the new lease standard in fiscal 2020 to materially increase reported balance-sheet assets and liabilities.
Outlook, management commentary and risks
- No specific earnings or revenue guidance is provided. Management expects 40–47 restaurant openings in fiscal 2019, including 33–38 international Chili’s franchise locations, and one Maggiano’s franchise location.
- Management highlighted Chili’s value offerings, menu and service improvements, loyalty marketing, and digital, To Go and delivery investments. Chili’s To Go sales grew 17.1% year over year; To Go represented approximately 11.7% of Chili’s To Go and dine-in sales at quarter-end. The company cited industry overcapacity, competition, discounting and challenges to traffic as headwinds.
- Management said available credit and expected operating cash flow should be adequate to fund operations and current debt obligations, and may consider further real-estate monetization. Credit ratings were S&P BB+ with stable outlook and Moody’s Ba1 with negative outlook.
- The May 2018 payment-card malware incident remains a significant contingency. Brinker said most company-owned Chili’s restaurants were affected during varying periods between March 21 and April 22, 2018. It had incurred $2.4 of related costs through quarter-end. Class actions and government inquiries are pending; no loss accrual was recorded because the outcome and amount were not determinable. Potential claims, fines or settlements could be material, and insurance coverage may reduce exposure.
- Other disclosed exposures include $55.3 of maximum potential liability under lease guarantees or secondary lease obligations, and $29.0 of undrawn standby letters of credit. The company identified no material changes to its previously reported risk factors.
Most important facts for investors to verify
- Underlying comparable-sales and margin trends, separating ASC 606 presentation effects and sale-leaseback gains from recurring operations.
- Whether Chili’s traffic, To Go growth and Maggiano’s performance can sustain sales improvement amid labor, rent and other cost pressures.
- Debt, revolver borrowing and interest costs after the subsequent $121.0 net draw, alongside ongoing buybacks and dividends.
- Final costs and outcomes of the cybersecurity litigation and regulatory inquiries, including insurance recovery.
- The financial impact of the 141 sale-leasebacks, long-term rent commitments, and the forthcoming lease-accounting change.