Brinker International, Inc. — Form 10-Q Summary
Business context and reporting period
Brinker owns, operates, develops and franchises Chili’s Grill & Bar and Maggiano’s Little Italy. The report covers the 13- and 26-week periods ended December 29, 2010, the second quarter and first half of fiscal 2011. Brinker had 1,559 restaurants at quarter-end. On The Border, sold in June 2010, is reported as discontinued operations in the prior-year comparison.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | First half FY2011 | First half FY2010 |
|---|---|---|---|---|
| Revenue | $671.9 million | $705.5 million | $1,326.8 million | $1,402.1 million |
| Operating income | $50.5 million | $23.1 million | $82.8 million | $41.3 million |
| Operating margin | 7.5% | 3.2% | 6.2% | 2.9% |
| Income from continuing operations | $37.5 million | $14.8 million | $58.9 million | $25.1 million |
| Net income | $37.5 million | $18.3 million | $58.9 million | $34.1 million |
| Diluted EPS | $0.41 | $0.18 | $0.61 | $0.33 |
- Quarterly revenue declined 4.8%; first-half revenue declined 5.4%. Lower comparable sales and reduced company-owned restaurant capacity were the main factors.
- System-wide comparable sales fell 3.7% in the quarter and 4.0% year to date. Chili’s comparable sales fell 4.9% in both periods, while Maggiano’s rose 4.7% and 3.2%, respectively. Traffic remained weak at Chili’s.
- Cost of sales fell to 26.7% of revenue in both current periods, from 29.4% in the quarter and 29.0% year to date. The filing attributes this primarily to menu-promotion changes and lower prices for several commodities. Restaurant labor also improved as a share of sales; restaurant expenses increased as a share of sales.
- Quarterly prior-year net income included $3.5 million after tax from discontinued operations; first-half prior-year net income included $9.0 million. Continuing-operations income is the more comparable profit measure.
- Operating cash flow was $70.0 million for the first half, down from $138.0 million. Capital expenditures were $31.8 million, versus $21.3 million.
Balance sheet, debt and liquidity
- At December 29, 2010, cash and equivalents were $114.5 million, total assets $1.61 billion, and shareholders’ equity $527.6 million.
- Debt was $535.5 million, comprising $22.0 million current and $513.5 million long-term, compared with $541.4 million at June 30, 2010. Cash declined by $230.2 million during the first half, principally reflecting share repurchases and dividends.
- Current assets of $325.6 million were below current liabilities of $432.9 million, resulting in a $107.3 million working-capital deficit. Management cited repurchases, dividends and seasonal gift-card liabilities among the factors affecting working capital.
- The company had an undrawn $200 million revolving credit facility expiring in June 2015 and reported compliance with all financial debt covenants. The term loan balance was $195 million; its stated rate was 3.01% at quarter-end. S&P’s rating was BBB- with stable outlook; Moody’s ratings remained below investment grade with stable outlook.
Changes, outlook, risks and unusual items
- Brinker repurchased approximately 13.6 million shares for $249.9 million in the first half and paid $28.6 million in dividends. Approximately $365 million remained under its repurchase authorizations at quarter-end; an additional approximately 2.1 million shares were repurchased for $50 million after quarter-end.
- Management estimated fiscal 2011 capital expenditures of $115 million to $120 million, expected to be funded from operating cash flow. It projected 45 to 53 restaurant openings in fiscal 2011, primarily franchised locations. The filing does not provide a specific revenue or EPS forecast.
- Management described the casual-dining environment as challenging and consumers as cautious. Priorities include improving guest experience, labor and kitchen efficiency, restaurant technology, Chili’s remodeling, menu and promotional initiatives, and international/franchise growth.
- Current first-half charges included $1.1 million of restaurant impairment, $2.5 million of charges related to previously closed restaurants, and $3.7 million of severance and other benefits. The quarter’s impairment related to two underperforming restaurants.
- Brinker remained secondarily liable for lease payments of up to $188.3 million related to restaurants sold or divested; no material liability was recorded. A California labor class-action matter remained unresolved, and the company said a potential loss could not be reasonably estimated. Management did not expect other pending or threatened matters to materially adversely affect results or financial condition.
- Key risks include weak consumer demand, competition, food and energy cost inflation, supply disruptions, labor availability, franchisee performance, regulation, technology and data-security risks, and possible asset impairments. Management reported effective disclosure controls and no material change in internal controls.
Important facts for investors to verify
- Whether comparable-sales and traffic trends improve, particularly at Chili’s, and whether Maggiano’s gains persist.
- Whether cost-of-sales and labor improvements are sustainable as commodity costs, wages and sales volumes change.
- How operating cash flow, the working-capital deficit and planned capital spending affect liquidity and debt reduction.
- The pace and average cost of further share repurchases, and the balance between buybacks, dividends and investment in restaurants.
- Any developments in the California labor litigation and potential exposure under guaranteed restaurant leases.