Business context and reporting period
Brinker International, Inc. operates, develops and franchises Chili’s Grill & Bar and Maggiano’s Little Italy. This Form 10-Q covers the 13 weeks ended March 28, 2012 (fiscal third quarter) and the 39 weeks ended March 28, 2012, compared with the corresponding periods ended March 30, 2011. Brinker had 1,574 restaurants in the United States and 31 countries and two territories outside the United States.
Financial performance and position
Amounts below are in millions, except per-share data. Percentages and changes are as reported or calculated from reported amounts.
| Metric | Fiscal Q3 2012 | Fiscal Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Revenue | $742.0 | $717.1 | $2,092.4 | $2,043.9 |
| Operating income | $68.0 | $61.2 | $163.5 | $144.1 |
| Net income | $44.9 | $40.2 | $104.2 | $99.1 |
| Diluted EPS | $0.56 | $0.45 | $1.28 | $1.05 |
| Operating margin | 9.2% | 8.5% | 7.8% | 7.0% |
| Net margin | 6.1% | 5.6% | 5.0% | 4.9% |
| Operating cash flow | Not separately reported for quarter | $233.8 | $188.2 | |
| Capital expenditures | Not separately reported for quarter | $85.2 | $48.9 |
- Third-quarter revenue rose 3.5%; operating income rose 11.1% and net income rose 11.6%. Year-to-date revenue increased 2.4%, operating income 13.5% and net income 5.1%.
- Cost of sales was 27.6% of revenue in Q3 versus 27.2% a year earlier, reflecting higher beef, oil and dairy commodity costs, partly offset by menu pricing. Restaurant labor declined to 31.5% from 31.8%, and restaurant expenses to 22.1% from 22.7%. General and administrative expense increased to $40.0 million from $35.6 million.
- Cash and cash equivalents were $72.7 million at March 28, 2012, versus $82.0 million at June 29, 2011. Total debt was $582.0 million, including $27.3 million current, versus $524.7 million at fiscal year-end. Shareholders’ equity fell to $333.7 million from $438.9 million.
- Cash from operations of $233.8 million was offset by $81.9 million used in investing and $161.1 million used in financing. Financing included $208.3 million of treasury-stock purchases, $37.9 million of dividends and $70.0 million of term-loan proceeds.
- The working-capital deficit was $208.6 million at quarter-end, compared with $184.2 million at June 29, 2011. The company reported $250 million available under its revolver at quarter-end; it borrowed $40 million from the revolver in April 2012 to fund share repurchases.
Material changes and management commentary
- Comparable restaurant sales improved: Q3 company-owned sales increased 4.5%, including Chili’s up 4.6% and Maggiano’s up 3.9%; system-wide comparable sales increased 4.2%. Year-to-date system-wide comparable sales rose 2.8%, following a 2.7% decline in the prior-year period.
- A $5.2 million reduction in revenue from a revised gift-card breakage estimate lowered Q3 diluted EPS by $0.04; comparable sales were not affected. Management attributed stronger sales primarily to pricing and improved guest traffic.
- Management cited labor efficiencies from Chili’s team service and kitchen initiatives, lower restaurant operating costs and improved Maggiano’s sales trends. It also noted that the economy remained suppressed despite some improvement in employment, confidence and consumer spending.
- Share repurchases were 8.4 million shares for $208.3 million year-to-date, compared with $359.0 million spent in the prior-year period. The quarterly dividend increased 14%, from $0.14 to $0.16 per share. The company repurchased a further 1.4 million shares for $39.0 million after quarter-end.
- Long-term debt increased principally following the revised $500 million unsecured credit facility, which includes a $250 million term loan and $250 million revolver and matures in August 2016. Brinker reported compliance with debt covenants. S&P rated the company BBB- with a stable outlook; Moody’s ratings were non-investment grade, also with a stable outlook.
Outlook, risks and contingencies
- Management estimated fiscal 2012 capital expenditures at approximately $120 million, expected to be funded from operating cash flow. It projected 37–39 restaurant openings for the fiscal year, primarily 33–35 international franchised locations, and targeted a 40% dividend payout ratio.
- Management said operating cash flow and credit-facility availability were adequate for operations and current debt obligations. These are expectations, not guarantees; the filing does not provide earnings or revenue guidance.
- Risks identified include competition, weak economic conditions and consumer spending, food and energy inflation, supply interruptions, regulation, franchisee performance, seasonality, brand reputation, technology and data security, and the execution of the company’s strategy.
- Lease guarantees and secondary liabilities associated with restaurant sales and divestitures had a maximum potential exposure of $151.2 million; no material liability had been recorded. In a California wage-and-hour class action, the state supreme court issued an opinion on April 12, 2012 and remanded some issues for further proceedings. The company said the possible loss could not be reasonably estimated and that it intended to defend its position. Management did not expect other pending or threatened legal matters to have a material adverse effect.
- Year-to-date other gains and charges included $4.2 million of restaurant closure charges, $1.1 million of impairment charges and $1.3 million of net legal charges, partly offset by $1.4 million of gains, primarily from land sales. Q3 also included approximately $1.1 million of gains from resolving previously reserved matters.
Important facts for investors to verify
- How much of earnings growth and EPS improvement reflects operating progress versus the substantial reduction in weighted-average shares from repurchases.
- The effects of commodity-cost inflation, menu pricing, traffic and the gift-card breakage estimate on future comparable sales and margins.
- Capital spending needs and returns from the Chili’s kitchen retrofit and reimaging programs, alongside the company’s share-repurchase and dividend commitments.
- Debt levels, covenant headroom, credit ratings and the use of revolver borrowings for repurchases after quarter-end.
- Developments in the California litigation and the potential exposure from lease guarantees.