Bloomin’ Brands, Inc. — Q2 2017 Form 10-Q
Reporting period: 13 and 26 weeks ended June 25, 2017; comparisons are with the periods ended June 26, 2016. Bloomin’ Brands operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s, through company-owned and franchised restaurants.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $1,033 million | $1,079 million | $2,177 million | $2,243 million |
| Income from operations | $42.2 million | $13.3 million | $111.3 million | $100.0 million |
| Net income attributable to Bloomin’ Brands | $35.6 million | $(9.2) million | $79.5 million | $25.3 million |
| Diluted EPS | $0.35 | $(0.08) | $0.76 | $0.21 |
| Restaurant-level operating margin | 15.2% | 15.5% | 16.4% | 16.7% |
| Operating cash flow | — | $183.1 million | $205.4 million |
Q2 total revenue declined 4.2%; first-half revenue declined 2.9%. Restaurant sales fell as restaurants were refranchised or closed, partly offset by openings, Brazil currency translation and franchise growth. Comparable U.S. sales were down 0.3% in Q2; Brazil comparable sales rose 12.6%.
Operating income improved substantially against the prior year, when the company recorded a $39.6 million impairment tied to the South Korea sale. The first-half comparison also reflects the prior-year $26.6 million debt defeasance loss. Q2 included a $7.4 million net gain on the sale of 54 U.S. restaurants. Adjusted diluted EPS, a non-GAAP measure, was $0.28 in Q2 versus $0.29 and $0.82 for the first half versus $0.76.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $103.5 million at June 25, 2017; $39.2 million was held by foreign affiliates.
- Total debt was approximately $1.127 billion, versus $1.089 billion at year-end 2016. Cash less total debt implies net debt of approximately $1.023 billion. The company was in compliance with debt covenants.
- Available revolving-credit capacity was $198.7 million, net of letters of credit. The senior secured facility matures in May 2019; management said it was exploring options to address that maturity.
- Working capital deficit was $471.1 million, including $269.9 million of unearned gift-card revenue. Management said negative working capital is typical for its restaurant model and expects available liquidity to cover obligations for at least 12 months.
- First-half capital expenditures were $116.3 million. The company estimated full-year 2017 capital expenditures of $260 million to $280 million.
- First-half operating cash flow was $183.1 million; investing activities used $24.6 million and financing activities used $183.3 million. Cash declined $23.7 million. First-half share repurchases totaled $198.9 million, and dividends paid were $16.3 million.
Material developments, outlook and risks
- The company closed or planned to close 43 underperforming restaurants under its 2017 Closure Initiative. It estimated total future cash expenditures of $25.3 million for that initiative and $10.1 million to $12.3 million for the Bonefish restructuring, primarily for lease obligations. Additional pre-tax charges were estimated at $3.6 million to $4.8 million and $2.5 million to $5.7 million, respectively.
- In April, the company sold 54 U.S. Outback and Carrabba’s locations for $36.2 million net proceeds; the locations now operate as franchises. It remained contingently liable on certain assigned leases. It also sold 15 restaurant properties in sale-leasebacks during the first half for $57.5 million gross proceeds, and reported subsequent sale-leasebacks of ten properties for $32.3 million.
- Labor expense rose as a share of restaurant sales, reflecting wage increases and investments in service; other restaurant costs also faced inflation and higher rent expense from sale-leasebacks. Cost of sales as a share of restaurant sales improved, helped by pricing, lower beef costs and cost initiatives.
- No specific earnings or revenue guidance was provided. Management cited competition, consumer traffic and spending, wage and commodity costs, foreign exchange, interest rates, leverage and the ability to execute restaurant plans among key risks.
- Potential undiscounted lease-guarantee payments were approximately $28.6 million; management recorded no liability, citing the buyers’ financial strength and operating history. The company reported $3.6 million of liabilities for various legal matters and paid a $2.3 million settlement in a former managers’ overtime case.
- The Q2 effective tax rate was 8.3% and the first-half rate was 18.4%, versus 366.2% and 44.6% in the comparable 2016 periods. The filing attributes the unusually high prior-year rates largely to the South Korea sale and 2017 rates partly to favorable discrete tax items and tax credits.
Important facts for investors to verify
- Whether comparable-sales and traffic trends improve, particularly given lower U.S. traffic and weaker restaurant-level margins.
- Progress on refinancing or otherwise addressing the May 2019 senior secured debt maturity, and the impact of variable-rate borrowing.
- Actual capital spending, cash generation and cash costs of restaurant closures and lease obligations.
- The sustainability of earnings excluding the prior-year impairment and debt charges, the refranchising gain, and favorable tax items.
- Share-repurchase activity and authorization balances by date: $129.0 million remained at June 25; the filing reported $95.0 million remaining as of its filing date after subsequent repurchases.