Bloomin’ Brands, Inc. — Q2 2019 Form 10-Q
Reporting period: The 13 weeks ended June 30, 2019, compared with the 13 weeks ended July 1, 2018; six-month comparisons cover 26 weeks. Bloomin’ Brands operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s, with U.S. and International reporting segments.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $1,021.9m | $1,031.8m | $2,150.1m | $2,148.3m |
| Operating income | $43.5m | $32.9m | $126.0m | $111.3m |
| Net income attributable to Bloomin’ Brands | $29.0m | $26.7m | $93.3m | $92.1m |
| Diluted EPS | $0.32 | $0.28 | $1.02 | $0.97 |
| Adjusted diluted EPS (non-GAAP) | $0.36 | $0.38 | $1.11 | $1.09 |
Q2 operating margin rose to 4.3% from 3.2%; first-half margin rose to 5.9% from 5.2%. Q2 U.S. comparable sales increased 0.6%, while U.S. traffic declined 1.4%; Brazil comparable sales increased 3.5%. Q2 restaurant-level operating margin was 15.0% on a consolidated basis, flat year over year. First-half cost of sales improved to 31.4% of restaurant sales from 31.9%, while labor costs increased to 29.3% from 29.0%.
In Q2, U.S. segment operating income was $78.8m versus $76.9m; International segment income was $6.9m versus a $2.0m loss. First-half International income was $20.6m versus $6.3m.
Cash flow, debt and liquidity
- For the first half, operating cash flow was $132.4m, investing cash outflow was $73.9m, and financing cash outflow was $63.4m. Capital expenditures were $80.8m. Cash, cash equivalents and restricted cash ended at $66.8m.
- At June 30, cash and cash equivalents were $64.7m. Long-term debt, including current maturities and net of discounts, was approximately $1.149bn; weighted-average rates were 4.14% on the term loan and 4.18% on revolving borrowings. The company had $291.7m of unused revolver capacity, net of letters of credit, and was in compliance with debt covenants.
- Lease liabilities recognized under the new lease standard totaled approximately $1.456bn. The balance sheet reported a $552.7m working-capital deficit; adoption of the lease standard added about $170m of current lease liabilities. Management notes that negative working capital is common in its business and says expected liquidity is adequate for at least the next 12 months.
Changes, outlook and risks
- Q2 revenue fell 1.0%, primarily reflecting foreign-exchange translation, domestic refranchising and restaurant closures; higher comparable sales partly offset those effects. Operating income improved on comparable sales and cost savings, partly offset by wage and commodity inflation, delivery costs, and the loss of sale-leaseback gain amortization under the new lease accounting standard.
- The company adopted ASC 842 on December 31, 2018, recording right-of-use assets and lease liabilities and a $141.3m net-of-tax cumulative accounting adjustment to beginning retained earnings. Prior-year periods were not restated, limiting balance-sheet comparability.
- Management estimated 2019 capital expenditures of $175m–$200m. No specific revenue or EPS guidance was provided in the filing. The Board authorized a $150m share-repurchase program; $107.0m was spent in Q2, leaving approximately $43.0m available at quarter-end. The company also declared a $0.10-per-share dividend payable in August.
- Key risks include consumer demand and competition, wage and commodity inflation, interest-rate exposure on variable-rate debt, Brazilian real movements, cybersecurity, and restaurant execution. A 10% currency-rate change would have affected first-half foreign-entity revenue by an estimated $24.0m and net income by $1.7m. The company does not hedge foreign-currency exposure. It reported $34.0m of undiscounted contingent lease guarantees, for which no liability was recorded; management considers default risk reduced by lessee financial strength. Ordinary-course legal matters had $2.4m of recorded liabilities, and management did not expect a material adverse impact.
- Q2 impairment and restaurant-closing charges were $1.9m, down from $8.9m; first-half charges were $5.5m, down from $11.6m. International restructuring charges included Puerto Rico. The annual goodwill and indefinite-lived intangible assessment resulted in no impairment charge.
Important facts for investors to verify
- Whether positive comparable sales can be sustained despite declining U.S. traffic, and how pricing, mix and promotions affect sales.
- Whether operating-margin improvement persists after wage, commodity, delivery and lease-accounting costs.
- Debt repayment capacity and liquidity after buybacks, dividends, capital spending and lease obligations; confirm covenant headroom and refinancing terms ahead of November 2022 maturities.
- The effects of Brazil currency movements and international operations on reported revenue and earnings.
- The assumptions behind adjusted, non-GAAP results and the effect of the lease-standard adoption on year-over-year comparability.