Brinker International, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, the 13 weeks ended September 24, 2014; comparable period ended September 25, 2013. Brinker operates and franchises Chili’s and Maggiano’s, with 1,622 restaurants in the U.S. and 29 countries and two territories outside the U.S.
Financial results
| Metric | Quarter ended Sep. 24, 2014 | Prior-year quarter |
|---|---|---|
| Total revenue | $711.0 million | $684.7 million |
| Operating income / margin | $54.3 million / 7.6% | $49.0 million / 7.2% |
| Net income | $32.7 million | $29.2 million |
| Diluted EPS | $0.49 | $0.42 |
| Operating cash flow | $70.9 million | $55.4 million |
| Capital expenditures | $40.2 million | $29.8 million |
| Cash and cash equivalents at period end | $63.7 million | $55.6 million at prior-year quarter end |
| Total debt at Sep. 24, 2014 | $893.2 million | $860.2 million at June 25, 2014 |
Net margin was 4.6%, compared with 4.3%. Cost of sales improved to 26.9% of company sales from 27.2%; labor rose to 33.1% from 32.9%, and restaurant expenses rose to 25.5% from 25.2%. Interest expense was essentially unchanged at $7.0 million. The company paid $17.2 million in dividends during the quarter; declared dividends were $0.28 per share, up 17% from $0.24.
Cash provided by operations less property and equipment spending was approximately $30.7 million, versus $25.6 million in the prior-year quarter. This is a simple calculation from reported cash-flow figures, not a company-defined measure. Working capital was negative $239.8 million at quarter-end.
Changes and operating performance
- Revenue grew 3.8%; company sales increased 3.4%, supported by positive comparable sales and higher restaurant capacity. Franchise and other revenue rose 19.8% to $24.2 million.
- System-wide comparable sales increased 1.9%, versus a 1.2% decline in the prior-year quarter. Company-owned comparable sales increased 2.4%; Chili’s company-owned comparables rose 2.6%, while Maggiano’s increased 0.6%.
- Net income increased 12.1% and diluted EPS rose from $0.42 to $0.49. Weighted-average diluted shares declined to 66.3 million from 68.8 million, reflecting, in part, repurchases.
- Operating cash flow increased by $15.5 million, attributed to higher earnings and working-capital changes. Capital spending increased, principally for restaurant construction and the Chili’s reimage program.
- Debt increased from June 25, 2014, including a $40 million revolver draw, primarily to fund share repurchases. The company repurchased approximately 1.1 million shares for $53.3 million.
Outlook, commentary, and risks
- Fiscal 2015 capital expenditures are estimated at $130–$140 million, expected to be funded entirely from operating cash flow. Management projected 12–14 company-owned openings and 39–43 franchise openings for the year, 51–57 total.
- Management estimated a fiscal 2015 effective tax rate of approximately 31%, assuming renewal of the work opportunity tax credit. Actual results may differ.
- Management cited technology, kitchen equipment, restaurant reimaging, menu changes, loyalty initiatives, and domestic and international expansion as efforts to support sales, traffic, efficiency, and profitability. It noted that industry traffic and sales have been challenging and that slow wage growth and consumer spending patterns remain relevant.
- Management said liquidity, operating cash flow, and available credit were adequate for foreseeable needs. At quarter-end, $130 million remained available under the revolver; the company reported compliance with debt covenants. S&P and Fitch rated it BBB- with stable outlooks; Moody’s ratings were below investment grade with stable outlooks.
- A preliminary agreement in the California Hohnbaum labor class action would resolve claims for no more than $56.5 million, subject to court approval and other conditions. Brinker had recorded an approximately $39.0 million reserve; the ultimate payment may differ.
- Other contingencies included $115.6 million of maximum potential lease-guarantee exposure and $32.1 million of undrawn standby letters of credit. No material lease-guarantee liability was recorded. The company stated that other pending matters were not expected to have a material adverse effect, while noting litigation outcomes remain uncertain.
- After quarter-end, Brinker borrowed an additional $43 million on its revolver and repurchased approximately 810,000 shares for $42.0 million. The board declared a $0.28-per-share dividend payable December 26, 2014.
- Risks identified include competition, weak or changing consumer demand, food and labor cost inflation, supply interruptions, regulation, litigation, franchisee performance, technology and data-security failures, and weather or other disruptions. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-sales growth and traffic trends persist, particularly across Chili’s and Maggiano’s.
- The court’s approval and claims process for the Hohnbaum settlement, and whether the eventual payment exceeds the recorded reserve.
- The pace and funding of share repurchases, subsequent revolver borrowing, debt covenant headroom, and credit ratings.
- Whether projected capital spending, restaurant openings, and reimaging deliver expected sales and operating benefits.
- The assumptions behind the approximately 31% tax-rate estimate, including renewal of the work opportunity tax credit.