Bloomin’ Brands, Inc. — Q1 2014 Form 10-Q
Reporting period: Thirteen weeks ended March 30, 2014; unaudited. Bloomin’ Brands operates Outback Steakhouse, Carrabba’s, Bonefish Grill, Fleming’s and Roy’s. It owned and operated 1,339 restaurants and franchised 161 across 48 U.S. states and 21 countries. The prior comparison is the three months ended March 31, 2013, so periods are not fully aligned. A fiscal-year change also left Q1 2014 with one fewer operating day; management estimates this reduced revenue by $7.5 million and attributable net income by $1.5 million.
Financial performance
| Metric | Q1 2014 | Prior period | Change |
|---|---|---|---|
| Total revenue | $1,157.9 million | $1,092.3 million | +6.0% |
| Income from operations | $90.0 million | $96.9 million | −7.1% |
| Net income attributable to Bloomin’ Brands | $53.7 million | $63.2 million | −15.0% |
| Diluted EPS | $0.42 | $0.50 | −16.0% |
| Cash from operations | $39.8 million | $18.1 million | +$21.7 million |
| Capital expenditures | $39.3 million | $41.0 million | −$1.6 million |
Restaurant sales increased 6.3% to $1,150.5 million. Growth included $67.8 million from consolidation of 47 Brazilian restaurants and $31.8 million from new restaurants; comparable restaurant sales fell $16.3 million. Domestic comparable sales were flat across the four core concepts combined, versus +1.6% in the prior period. GAAP operating margin was 7.8%, down from 8.9%; net margin attributable to Bloomin’ Brands was 4.6%, down from 5.8%. Adjusted diluted EPS, a non-GAAP measure, was $0.46 versus $0.50.
Cost of sales rose to 32.5% of restaurant sales from 32.3%, reflecting higher beef, seafood and promotional-menu costs, partly offset by savings and pricing. Labor costs improved to 27.1% from 27.7%; other restaurant operating costs increased to 22.3% from 21.6%. Restaurant-level operating margin was 18.2% versus 18.4%.
Financial position and liquidity
- Cash and cash equivalents were $172.6 million at March 30, down from $209.9 million at year-end; restricted cash was $27.9 million.
- Total debt was approximately $1.405 billion, including $925.0 million on the senior secured term loan and $482.0 million on the commercial mortgage-backed loan and related mezzanine debt. The company reported covenant compliance.
- Unused revolving-credit capacity was approximately $195.4 million, net of $29.6 million in letters of credit. No revolver borrowings were outstanding.
- Working capital deficit was $226.3 million, including $261.3 million in unearned revenue, principally gift cards. Management said operating cash receipts generally precede payment of current liabilities.
- Operating cash flow less capital expenditures was approximately $0.5 million. Cash used in investing was $41.8 million, and cash used in financing was $34.0 million; cash declined by $37.3 million in the quarter.
Material changes, outlook and risks
- Revenue growth reflected the Brazilian joint venture consolidation, new openings and acquisitions; underlying comparable sales were pressured by lower traffic, product mix, winter weather, holiday timing and consumer-spending conditions. Menu price increases partly offset these effects.
- Operating income declined despite lower net interest expense ($16.6 million versus $20.9 million), as restaurant-level margins softened, depreciation increased, and restaurant-closure costs rose.
- The company incurred $6.1 million in impairment and restaurant-closing expenses, mainly tied to its previously announced plan to close 22 underperforming locations. It reported $4.9 million of net closure-related costs after a deferred-rent-liability reversal.
- Management expected to open 55–60 system-wide restaurants in 2014, approximately half domestic and half international, and estimated 2014 capital expenditures of $250–$280 million. It identified Bonefish Grill as a domestic development priority and described menu refreshes, remodeling and marketing as sales initiatives.
- In April 2014, the company began refinancing its senior secured credit facilities. Terms were not final; management expected debt levels to remain broadly consistent and annualized interest expense to decline if completed. Completion and terms were not assured.
- Management said expected operating cash flow, borrowing capacity, short-term investments and restricted cash were adequate for the next 12 months, subject to revenue, cash-flow, cost and working-capital performance. It provided no specific earnings guidance in the supplied filing text.
- Key risks include substantial leverage and restrictive covenants, variable-rate debt, commodity and labor-cost inflation, weak consumer traffic, competition, foreign exchange, and possible impairment charges. The company also faces wage-and-hour lawsuits in Nevada and California; outcomes are not predictable.
- The IRS issued a $5.0 million FICA adjustment related to employee tips for 2010; the company paid it in April 2014. It had recorded $17.0 million in liabilities for the broader payroll-tax matter, including potential 2011–2012 exposure.
- Management stated that disclosure controls were effective. U.S. SAP implementation occurred during Q1, with related internal controls and processes modified.
Most important facts for investors to verify
- Comparable-sales and traffic trends by concept, separating underlying performance from Brazilian consolidation, new units and the shorter operating period.
- Progress on planned restaurant openings, the 22-location closure initiative, and the $250–$280 million capital-spending estimate.
- Refinancing completion, final pricing and covenants; debt maturities and the company’s ability to service debt while funding growth.
- Cash conversion and liquidity, including the seasonal gift-card balance, partner-plan funding needs and cash held by foreign affiliates.
- Resolution and potential additional cost of IRS payroll-tax examinations and the disclosed wage-and-hour litigation.