Bloomin’ Brands, Inc. — Q1 2018 Form 10-Q
Reporting period: Thirteen weeks ended April 1, 2018; comparative period ended March 26, 2017. Bloomin’ Brands operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s. At quarter-end, it reported 1,494 system-wide restaurants, including company-owned and franchised locations.
Financial performance
- Revenue: $1.116 billion, down 3.3% from $1.155 billion (prior period restated for revenue-recognition adoption). Restaurant sales fell to $1.099 billion from $1.144 billion; franchise and other revenue rose to $17.5 million from $10.9 million.
- Operating results: Operating income was $78.4 million versus $76.8 million; operating margin was 7.0% versus 6.7%. Net income was $66.1 million versus $49.6 million, and net income attributable to Bloomin’ Brands was $65.4 million versus $48.6 million. Diluted EPS was $0.68 versus $0.46.
- Restaurant economics: Combined U.S. comparable sales increased 2.8%, while U.S. traffic declined 0.2% and average check rose 3.0%. U.S. restaurant-level margin was 16.3% versus 17.6%; International margin was 19.4% versus 20.3%.
- Cash flow: Operating cash flow was $51.5 million, down from $136.2 million. Capital expenditures were $48.3 million; investing cash outflow was $46.2 million. Financing cash outflow was $29.1 million, including $51.0 million of share repurchases and $8.4 million of dividends. Cash and cash equivalents ended at $105.8 million, down from $128.3 million at year-end.
- Debt and liquidity: Total debt, net, was $1.142 billion, compared with $1.118 billion at December 31, 2017. Revolver borrowings were $631.0 million; unused capacity was $345.5 million, net of letters of credit. The company reported covenant compliance. Working capital was negative $396.1 million, including $235.7 million of unearned revenue, primarily gift cards.
- Tax and shareholder returns: The effective tax rate fell to 2.8% from 26.6%, supporting higher net income; management cited the federal tax-rate reduction, lower forecasted pretax income and equity-compensation tax benefits. The quarterly dividend was $0.09 per share. The company repurchased 2.12 million shares for $51.0 million at an average $24.10 per share.
Changes and interpretation
Revenue declined mainly because of domestic refranchising, restaurant closures and a one-week fiscal-calendar shift, partly offset by comparable-sales growth and higher franchise revenue. Management estimated the calendar shift reduced restaurant sales by approximately $19 million. The prior-year quarter also included substantially higher impairment and closure charges ($19.1 million versus $2.7 million), helping lift current operating income. Higher labor, commodity and operating costs, and increased interest expense partly offset those benefits. The 2017 comparison was retrospectively restated for adoption of the revenue-recognition standard; this changed reported revenue and other line items.
Outlook, risks and unusual items
- Management said expected liquidity sources should cover debt service, lease obligations, capital expenditures and working capital for at least 12 months, contingent on achieving expected revenue and cash flow and managing costs and working capital.
- Estimated 2018 capital expenditures were approximately $200 million. Management said it continued to evaluate whether to make additional debt payments ahead of schedule.
- Closure initiatives were expected to generate a further $3.6 million to $6.0 million in pretax expenses over the next year and $22.2 million to $29.0 million in total future cash expenditures, primarily lease-related, extending as late as January 2029.
- The company had not completed its accounting for all Tax Act effects; estimates could change materially. It had not selected an accounting policy for GILTI and did not expect GILTI in 2018.
- The company expected the 2019 lease-accounting standard to significantly affect its balance sheet through recognition of operating-lease assets and liabilities.
- Risk factors include restaurant competition and consumer demand, food and labor cost inflation, food safety, foreign exchange and international operations, cyber and data-security threats, leverage and variable interest rates, and the ability to sustain dividends and repurchases. The filing reported $5.0 million of recorded liabilities for legal matters and $28.8 million of potential undiscounted lease-guarantee payments; management considered material adverse outcomes from ordinary-course litigation unlikely.
Key facts for investors to verify
- Whether comparable-sales growth can persist while traffic, particularly at several U.S. concepts, remains weak.
- How much of the earnings increase reflects lower closure charges and the unusually low tax rate rather than recurring operating improvement.
- Whether operating cash flow recovers after the quarter’s large working-capital outflow, and how the $200 million capital-spending estimate is funded.
- Debt levels, variable-rate exposure, revolver availability and covenant headroom as borrowings and interest rates change.
- The final impact of Tax Act accounting, closure obligations and forthcoming lease-accounting adoption.