Brinker International, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2014, ended March 26, 2014. The filing covers Chili’s Grill & Bar and Maggiano’s Little Italy. Brinker owned, operated, or franchised 1,608 restaurants in the U.S. and 31 countries and two territories. The request metadata says “2013 Q3,” but the filing itself reports fiscal 2014 Q3.
Financial performance
| Metric | 13 weeks ended Mar. 26, 2014 | Prior-year quarter | 39 weeks ended Mar. 26, 2014 | Prior-year period |
|---|---|---|---|---|
| Total revenue | $758.4 million | $742.8 million | $2,146.7 million | $2,116.0 million |
| Operating income | $87.2 million | $79.3 million | $200.5 million | $187.4 million |
| Operating margin | 11.5% | 10.7% | 9.3% | 8.9% |
| Net income | $56.3 million | $52.0 million | $125.2 million | $117.0 million |
| Diluted EPS | $0.82 | $0.71 | $1.83 | $1.56 |
| Operating cash flow | — | $277.1 million | $222.6 million |
- Quarterly revenue grew 2.1%; year-to-date revenue grew 1.5%. Quarterly company sales rose 2.0%, supported by capacity and positive comparable sales. System-wide comparable sales were up 0.5% for the quarter, while traffic declined 1.2% at company-owned restaurants.
- For the quarter, cost of sales fell to 26.5% of company sales from 27.4%, and labor fell to 31.6% from 32.0%. Restaurant expenses increased to 23.2% from 22.7%. Management cited menu changes, waste control, equipment efficiencies, pricing, higher advertising, utilities, facilities costs, and strategic initiatives as relevant drivers.
- Cash and equivalents were $64.6 million at quarter-end, versus $59.4 million at June 26, 2013. Gross debt was $845.1 million, including $58.0 million drawn on the revolving facility; $192 million remained available. The company reported compliance with debt covenants. Its working capital deficit was $221.1 million.
- Investing cash outflow was $113.1 million, including $114.0 million of capital expenditures. Financing cash outflow was $158.7 million, including $191.8 million of share repurchases and $47.6 million of dividends. Operating cash flow less capital expenditures was approximately $163.1 million, calculated from the reported figures.
Material changes and notable items
- Net income and diluted EPS increased year over year in both the quarter and year-to-date periods; diluted weighted-average shares declined, alongside substantial repurchases.
- Brinker repurchased approximately 4.1 million shares for $191.8 million in the first nine months. It paid $47.6 million in dividends and raised the quarterly dividend 20%, from $0.20 to $0.24 per share. Approximately $354.7 million remained under repurchase authorizations at quarter-end.
- Year-to-date “other gains and charges” were $4.3 million, versus $2.2 million a year earlier. Fiscal 2014 included $1.3 million of restaurant impairments, $2.3 million of closure charges, and $1.1 million of severance costs, partly offset by a $0.6 million gain primarily related to land sales.
- Foreign-currency translation produced a $1.9 million year-to-date other comprehensive loss; it was not included in net income.
Outlook, commentary, and risks
- Management estimated fiscal 2014 capital expenditures of $150–$160 million, expected to be funded from operating cash flow. It projected 43–50 restaurant openings for the year, including 9–14 company-owned and 34–36 franchised locations.
- Management said casual-dining sales and traffic remained soft despite modest improvement in economic indicators. Initiatives include Chili’s menu and kitchen improvements, restaurant reimaging, operating software, and international/franchise growth. The company targeted reimaging approximately 75% of company-owned Chili’s restaurants by fiscal year-end and described liquidity as adequate for the foreseeable future.
- Brinker disclosed a California labor class action involving meal-period and rest-break claims. Following a certification ruling, the company considered a loss reasonably possible, but said the amount or range could not be reasonably estimated; mediation after quarter-end did not produce a settlement.
- Outstanding lease guarantees or secondary lease liabilities totaled $123.5 million; no material liability had been recorded. Other disclosed risks include competition, weak consumer demand, commodity and labor costs, litigation, technology and data security, and execution of strategic initiatives.
Facts investors should verify
- Whether comparable-sales and traffic trends improved after the quarter, particularly at Chili’s.
- Progress and returns from restaurant reimaging, kitchen investments, and the projected fiscal 2014 openings and capital spending.
- Debt and covenant capacity after additional April 2014 revolver borrowing and subsequent share repurchases.
- Developments in the California labor litigation and any potential financial exposure.
- Whether earnings and cash generation can sustain the repurchase pace and dividend policy.