Bloomin’ Brands, Inc. — Q2 2014 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 29, 2014; comparisons are to the three and six months ended June 30, 2013. The company operates Outback Steakhouse, Carrabba’s, Bonefish Grill, Fleming’s and Roy’s. Results include consolidated Brazilian operations acquired in November 2013, limiting comparability. A fiscal-year change also left one fewer operating day in the first half of 2014, which management estimated reduced revenue by $7.5 million and attributable net income by $1.5 million; it had no Q2 impact.
Financial performance
| Metric | Q2 2014 | Prior-year comparable | First half 2014 | Prior-year comparable |
|---|---|---|---|---|
| Total revenue | $1,110.9 million | $1,018.9 million | $2,268.8 million | $2,111.1 million |
| Operating income / margin | $62.4 million / 5.6% | $67.9 million / 6.7% | $152.4 million / 6.7% | $164.7 million / 7.8% |
| Net income attributable to Bloomin’ Brands | $26.4 million | $74.9 million | $80.1 million | $138.1 million |
| Diluted EPS | $0.21 | $0.58 | $0.63 | $1.08 |
| Adjusted net income / adjusted diluted EPS | $34.2 million / $0.27 | $31.8 million / $0.25 | $92.7 million / $0.72 | $95.0 million / $0.74 |
| Operating cash flow | Not separately provided for Q2 | $97.2 million | $94.7 million | |
| Capital expenditures | Not separately provided for Q2 | $97.6 million | $97.2 million |
Q2 restaurant sales increased 9.6% to $1,104.4 million; first-half restaurant sales rose 7.9% to $2,255.0 million. Growth primarily reflected the Brazil consolidation and new restaurants. Domestic comparable sales for core concepts increased 0.6% in Q2 and 0.3% in the first half. Q2 traffic was flat; first-half traffic was lower, which management attributed partly to severe winter weather and weak discretionary spending. South Korean comparable sales also weighed on results.
Q2 cost of sales increased to 32.5% of restaurant sales from 32.3%; labor improved to 27.4% from 28.2%, while other restaurant operating costs rose to 24.0% from 23.6%. Restaurant-level operating margin was 16.1% versus 16.0%. First-half margin was 17.2%, unchanged on a GAAP basis. Lower income-tax expense versus the prior-year period did not offset the substantial 2013 tax benefit from release of a valuation allowance; Q2 2013 net income was therefore not a straightforward operating comparison.
Balance sheet, cash flow and debt
- Cash and cash equivalents were $155.8 million at June 29, down from $209.9 million at December 31, 2013. First-half cash flow was $97.2 million from operations, $101.2 million used in investing and $52.7 million used in financing; cash declined by $54.0 million.
- Total debt was $1.412 billion, versus $1.429 billion at year-end. The May refinancing rearranged facilities without increasing total indebtedness: $300 million Term Loan A, $225 million Term Loan B and $400 million drawn on a $600 million revolver. The company reported $170.4 million of available revolver capacity, net of letters of credit.
- Current assets were $427.9 million and current liabilities $660.2 million, a working-capital deficit of $232.3 million. Management noted that negative working capital is common in the restaurant business, in part because gift-card cash is collected before redemption. Unearned revenue, including unredeemed gift cards, was $249.3 million.
- Debt covenants include a maximum total net leverage ratio of 5.00x through fiscal 2017, stepping down to 4.75x thereafter. The company reported covenant compliance at June 29. It expected no payments beyond required minimum amortization through June 28, 2015, but 50% of defined annual excess cash flow may be subject to mandatory term-loan prepayment.
Outlook, risks and notable items
- Management expected 55–60 system-wide restaurant openings in 2014, approximately half domestic and half international, and estimated 2014 capital expenditures of $250–$270 million. Liquidity was considered adequate for the next 12 months, subject to revenue, cash flow and cost management.
- Priorities include comparable-sales growth through remodeling, promotions, lunch expansion and menu innovation; Bonefish Grill is the leading domestic development priority. Carrabba’s planned its first Brazil location for 2015. Management was evaluating an exit from Roy’s but had no committed plan or timetable.
- Management expected South Korean competition and weaker discretionary spending to pressure comparable sales for at least the next 12 months. It also cited domestic consumer weakness, commodity inflation, labor and operating costs, interest-rate and foreign-exchange exposure, and the company’s substantial leverage and restrictive debt covenants as risks.
- The May debt refinancing generated an $11.1 million loss on extinguishment and modification. First-half restaurant-closure and related costs were $4.9 million net, associated mainly with the previously announced initiative to close 22 underperforming restaurants. The company recorded no goodwill or indefinite-lived intangible impairments in the period.
- The company recorded $12.0 million in current liabilities for payroll-tax audits. It paid a $5.0 million IRS adjustment concerning 2010 employee cash tips and said the IRS had begun an examination of 2011; the scope had also been proposed to include 2012.
- Pending employee wage-and-hour actions include a purported nationwide Outback collective action and a California class action involving a franchisee. The company disputed the allegations; outcomes were not predictable. Management reported effective disclosure controls and no material change in internal control during Q2.
Most important facts for investors to verify
- How much reported revenue and operating performance reflect the Brazil consolidation and new-unit growth versus underlying comparable-sales trends.
- Whether restaurant margins and traffic improve amid commodity, labor and occupancy cost pressures, particularly in South Korea.
- Cash generation, capital-spending plans, revolver availability and compliance with leverage covenants and mandatory debt-prepayment terms.
- The potential exposure from the IRS payroll-tax examinations and pending wage-and-hour litigation.
- Whether the projected 2014 openings and spending plans remain achievable, and whether management’s evaluation of Roy’s leads to a committed exit plan.