Bloomin' Brands, Inc. quarterly report, Q3 FY2018

Bloomin’ Brands, Inc. — Q3 2018 Form 10-Q

Reporting period: Thirteen and thirty-nine weeks ended September 30, 2018; comparisons are to the corresponding periods ended September 24, 2017. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless noted. The company operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s, with U.S. and International reporting segments.

Financial performance

Metric	Q3 2018	Q3 2017	39 weeks 2018	39 weeks 2017
Total revenue	$965.0m	$955.6m	$3,113.3m	$3,146.8m
Income from operations	$12.5m	$5.2m	$123.8m	$123.4m
Net income attributable to Bloomin’ Brands	$4.1m	$5.6m	$96.2m	$89.3m
Diluted EPS	$0.04	$0.06	$1.02	$0.88
Net interest expense	$11.6m	$10.7m	$33.2m	$29.4m
Operating margin	1.3%	0.5%	4.0%	3.9%

Q3 restaurant sales rose 1.0%, mainly from stronger U.S. comparable sales and restaurant openings, partly offset by Brazil currency translation. U.S. comparable sales increased 2.9%; Brazil comparable sales declined 3.3%.
Q3 restaurant-level operating margin was 12.5% versus 13.0% a year earlier; the company’s adjusted measure was 12.4% versus 13.0%. Cost of sales rose to 32.4% of restaurant sales from 31.6%, reflecting commodity inflation. Labor was 30.4% in both periods.
For the 39-week period, revenue declined 1.1%, while restaurant sales declined 1.3%. The filing attributes the decline partly to domestic refranchising, restaurant closures, Brazilian real depreciation and a one-week fiscal-calendar shift, which reduced 2018 restaurant sales by approximately $19m. Adjusted diluted EPS was $1.20 versus $1.01.
Cash from operations was $155.2m, down from $223.0m. Investing used $124.3m, including $146.3m of capital expenditures; financing used $77.0m. Cash and cash equivalents ended at $78.6m, down $50.9m from the beginning of the period.

Balance sheet and liquidity

At September 30, 2018, total debt, net, was $1,150.8m, including $650.0m outstanding on the revolving facility. The senior secured facilities carried a 3.95% weighted-average rate. Cash was $78.6m; net debt was approximately $1,072m, calculated as debt less cash.
Unused revolver capacity was $327.9m, net of $22.1m in letters of credit. The company reported compliance with debt covenants and said it expects liquidity to cover obligations for at least the next 12 months, subject to operating and working-capital performance.
Working capital deficit was $392.2m, compared with $453.2m at year-end 2017. Current liabilities included $202.3m of unearned revenue, primarily gift cards; management said negative working capital is common in the restaurant business.
Capital expenditures were estimated at approximately $200m for 2018. The company paid $25.1m in dividends and repurchased $99.0m of shares during the 39 weeks; $51.0m remained under its $150m repurchase authorization.

Material changes, outlook and risks

Q3 operating income improved mainly because impairment and closure costs were lower than in 2017, alongside cost savings and higher average check. Higher commodity and labor costs, incentive compensation and weaker Brazil comparable sales partly offset the improvement. Despite higher operating income, Q3 attributable net income and diluted EPS fell, with higher interest expense contributing.
International results weakened: Q3 International revenue was $103.5m versus $116.8m, and segment operating income was $7.8m versus $8.4m. The 39-week segment operating income fell to $14.1m from $26.8m. Management cited Brazil conditions, currency, inflation and restructuring.
Management reported that Brazil’s truckers’ strike and election-period unrest caused lost operating days. It expected consumer confidence to resume an upward trend after the October election and reported stronger trends, including positive comparable sales in Brazil in the final month of Q3.
The company recognized $9.1m of impairment and closure charges in the first 39 weeks related to international restructuring, including China. It estimated a further $2.2m–$2.8m in closure-related expense through Q3 2019 and $21.6m–$26.5m in future cash expenditures, primarily lease obligations extending as late as January 2029.
No specific earnings or revenue guidance is provided in the supplied filing text. The company said it was assessing the impact of adopting the new lease standard in 2019; it expected recognition of operating-lease assets and liabilities and a future increase in other restaurant operating expense as deferred sale-leaseback gains cease being amortized through earnings.
Key disclosed risks include restaurant competition, food safety, wage and commodity inflation, consumer spending and traffic, foreign exchange exposure, leverage and variable interest rates, capital needs, asset impairment, cybersecurity and regulatory or tax changes. A 10% currency-rate change would have affected foreign-entity revenue by $35.8m and net income by $0.6m for the 39-week period, according to the filing. The company did not hedge foreign-currency exposure.
The Tax Act accounting remained provisional; further analysis or tax-authority guidance could materially affect tax expense. Ordinary-course legal matters had $2.8m of recorded liabilities. Lease guarantees could require up to $27.8m of undiscounted payments if primary lessees default; no liability was recorded.

Most important facts for investors to verify

Whether U.S. comparable-sales growth and average-check increases can offset negative traffic and food, wage and other cost inflation.
Whether Brazil sales and International segment profitability recover, and the effects of currency movements and international restructuring.
Whether cash generation, debt service, planned capital spending, dividends and buybacks remain supportable given lower operating cash flow and substantial leverage.
The final impact of lease-standard adoption and completion of provisional Tax Act accounting.
The timing and ultimate cash cost of restaurant closures, lease guarantees and other contingencies.