Business context and reporting period
Brinker International, Inc. (NYSE: EAT) operates and franchises Chili’s Grill & Bar and Maggiano’s Little Italy. This Form 10-Q covers the 13 weeks ended September 23, 2020, the first quarter of fiscal 2021, and compares results with the 13 weeks ended September 25, 2019. The company had 1,660 restaurants: 1,116 company-operated and 544 franchised.
Results reflect the COVID-19 pandemic: substantially all company dining rooms and patios were open by quarter-end, but at limited capacity. Lower traffic was partly offset by off-premise sales.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $740.1 million | $786.0 million | Down 5.8% |
| Operating income | $24.4 million | $31.2 million | Down 21.8% |
| Operating margin | 3.3% | 4.0% | Down 0.7 percentage point |
| Net income | $10.7 million | $14.9 million | Down 28.2% |
| Diluted EPS | $0.23 | $0.39 | Down $0.16 |
| Operating cash flow | $82.8 million | $86.6 million | Down $3.8 million |
| Capital expenditures | $13.6 million | $20.5 million | Down $6.9 million |
Company sales were $728.2 million, down 4.7%; franchise and other revenues were $11.9 million, down 46.2%. Food and beverage costs were 26.6% of company sales (26.7% prior year), restaurant labor 34.0% (35.2%), and restaurant expenses 27.8% (27.1%). Higher delivery fees and related supplies, along with sales deleverage, weighed on restaurant expenses.
Cash and cash equivalents were $58.8 million at quarter-end, versus $43.9 million at June 24, 2020. Total debt, including finance leases, was $1,180.1 million; long-term debt less current installments was $1,158.3 million. The revolving facility had $426.3 million outstanding and $573.7 million available. Shareholders’ deficit was $465.1 million. The company reported compliance with debt covenants.
Material changes and segment trends
- Comparable sales declined 7.2% at Chili’s and 38.6% at Maggiano’s; system-wide comparable sales declined 11.0%. Company-owned comparable sales fell 10.9%, including a 5.0% traffic decline and a negative 6.3% mix shift, partly offset by 0.4% price impact.
- Chili’s revenue declined 1.3% to $686.5 million and segment operating income fell to $56.5 million from $61.1 million. Maggiano’s revenue fell 40.7% to $53.6 million and the segment recorded a $4.7 million operating loss, versus $1.5 million operating income.
- Franchisee sales were approximately $164.0 million, compared with $298.3 million. The prior-year period included 116 Chili’s restaurants acquired from a franchisee; the acquisition contributed $49.7 million to the year-over-year company-sales comparison.
- Operating cash flow remained positive, while the company made $46.6 million of net repayments on its revolving facility. Cash used in investing activities was $13.0 million, versus $115.8 million in the prior year, which included the restaurant acquisition.
Outlook, risks, and unusual items
- Management said the duration and financial effects of COVID-19 remain difficult to estimate. Capacity restrictions, reduced traffic, possible renewed closures, staffing challenges, supply-chain disruption, and consumer behavior remain significant uncertainties.
- Management believes operating cash flow and available credit are adequate to fund operations and debt obligations over the next year. The filing does not provide earnings or revenue guidance. Fiscal 2021 development projections were 8 company-owned openings and 10–13 franchise openings; these plans remain subject to conditions.
- Off-premise sales represented approximately 48% of Chili’s sales in the quarter, split approximately 61% to-go and 39% delivery. The company highlighted continued investment in off-premise capabilities and its It’s Just Wings virtual brand, launched in June 2020.
- Other gains and charges were $3.8 million, including $1.5 million of restaurant closure charges and $1.2 million of COVID-related costs, partly offset by a $0.5 million lease modification gain. The prior-year quarter included a $3.1 million lease modification gain.
- The quarterly cash dividend and share repurchase program remained suspended. The company amended its revolving facility, extending maturity to December 12, 2022, with a commitment reduction to $900 million scheduled for September 2021. It also deferred $34.2 million of payroll taxes under the CARES Act.
- A putative class action related to a 2018 payment-card data incident remained pending. Plaintiffs seek damages exceeding $5 million and other relief; the company said the potential loss was not determinable and had not accrued a liability. Lease guarantees were $37.7 million, and undrawn standby letters of credit were $29.5 million.
Important facts for investors to verify
- Whether dining-room capacity, traffic, staffing, and franchisee sales recover, and how these developments affect comparable sales and restaurant margins.
- Whether cash generation and revolving-credit availability remain sufficient under prolonged or renewed pandemic restrictions, including compliance with debt covenants.
- The pace and economics of off-premise sales, delivery costs, and the It’s Just Wings offering as pandemic conditions change.
- Whether the pending data-incident litigation, lease guarantees, or other contingencies result in material costs or liabilities.
- Whether projected restaurant openings proceed and when the suspended dividend and share repurchase program might resume.