Brinker International, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2019, the 13 weeks ended March 27, 2019; year-to-date figures cover 39 weeks. The filing was signed May 3, 2019. Brinker operates Chili’s and Maggiano’s; at quarter-end it owned, operated, or franchised 1,676 restaurants.
Financial performance
- Quarter revenue: $839.3 million, up 3.3% from $812.5 million. Comparable sales increased 2.6% at company restaurants, with traffic up 2.8%; system-wide comparable sales rose 1.8%.
- Quarter earnings: Operating income was $70.2 million versus $72.7 million; net income was $49.8 million versus $46.9 million. Diluted EPS was $1.31 versus $1.02, reflecting in part a lower effective tax rate and fewer weighted-average shares.
- Year-to-date revenue and earnings: Revenue was $2,383.8 million, up 2.8%; operating income was $166.7 million versus $155.7 million; net income was $108.2 million versus $82.1 million. Diluted EPS was $2.75 versus $1.74.
- Margins and costs: Operating margin was 8.4% for the quarter versus 8.9% a year earlier; year-to-date it was 7.0% versus 6.7%. Restaurant costs as a share of company sales increased, with higher wages, rent, menu mix, commodities, and advertising contributing. Sale-leaseback-related rent increased restaurant expenses.
- Cash flow and investment: Year-to-date operating cash flow was $150.6 million, down from $237.7 million, primarily due to $75.0 million of taxes paid on sale-leaseback gains. Capital expenditures were $128.0 million versus $69.5 million, mainly for Chili’s remodels and the new headquarters. Investing cash flow was $344.3 million, including $468.8 million net sale-leaseback proceeds.
- Debt and liquidity: Long-term debt, including current installments, was $1,227.2 million net of issuance costs, down from $1,506.7 million at June 27, 2018. Revolver borrowings were $543.3 million, with $456.7 million available; cash was $12.2 million. Brinker reported compliance with debt covenants. It drew $63.0 million net on the revolver after quarter-end.
- Capital returns: The company repurchased 3.6 million shares for $167.7 million year-to-date and paid $46.0 million in dividends. The quarterly dividend was $0.38 per share.
Material changes and unusual items
- Brinker sold and leased back 149 restaurant properties for $477.4 million gross proceeds. It recorded a $298.8 million total gain, of which $29.4 million was recognized in earnings year-to-date and $269.4 million remained deferred. Proceeds were principally used to repay revolver borrowings. The transactions also create 15-year operating leases with renewal options and higher ongoing rent expense.
- ASC 606 adoption changed presentation and timing for certain franchise-related revenue. Advertising fees are now reported gross in franchise and other revenues rather than netted against restaurant expenses; the filing estimates this gross presentation added $5.5 million to quarterly and $15.9 million to year-to-date franchise and other revenue. The company says timing changes for gift-card breakage and franchise/development fees did not significantly affect current-period results. Comparisons are therefore not fully like-for-like.
- The effective tax rate was 10.3% for the quarter and 11.7% year-to-date, versus 20.4% and 28.7%. The company attributes the decline primarily to the Tax Cuts and Jobs Act and FICA tax credits; sale-leaseback gains generated $76.0 million of tax expense, of which $75.0 million was paid during the period.
- Other items included a $5.8 million gain on the prior headquarters sale, $5.2 million of headquarters relocation costs, Chili’s remodel write-offs, restaurant closure costs, and sale-leaseback gains. Overall, other gains and charges were a net benefit of $3.5 million in the quarter and $12.4 million year-to-date.
Outlook, commentary, and risks
- Management emphasized Chili’s menu and food-quality initiatives, value offers, loyalty and digital marketing, and off-premise sales. Chili’s To Go sales grew 17.2% in the quarter and represented about 13.0% of Chili’s sales; Maggiano’s carryout grew 18.0%.
- Fiscal 2019 projected openings were 28–34 restaurants in total, including 21–24 international Chili’s franchises. Management said it would continue evaluating ways to monetize remaining owned real estate and considered existing cash generation and revolver availability adequate for operations and debt repayment. No earnings or revenue guidance was provided in the filing.
- Cybersecurity remains a material contingency: malware affected customer payment-card data at most company-owned Chili’s restaurants during varying periods in March–April 2018. Putative class actions were consolidated in Florida; the company had recorded no litigation liability because a loss was not determinable. Potential card-network reimbursement, penalties, regulatory remedies, and future legal and professional expenses remain uncertain. The company reported $4.1 million of incident-related costs through quarter-end, including an insurance-recovery receivable.
- Other exposures include $58.4 million of maximum potential future rent under lease guarantees or secondary lease liability, and $29.0 million of undrawn standby letters of credit. Management reported no legal matter expected to materially adversely affect consolidated financial condition or results, based on its assessment.
- Brinker expected adoption of the new lease standard in fiscal 2020 to materially increase reported assets and liabilities; it cited about $1.06 billion of undiscounted remaining operating-lease payments as of March 27, 2019. It did not expect a material effect on cash flows or liquidity. Credit ratings were S&P BB+ with stable outlook and Moody’s Ba1 with negative outlook.
Important facts for investors to verify
- How comparable sales, traffic, and restaurant-level costs develop, particularly wage, commodity, and lease expense trends.
- The cash-flow and leverage effects of continued share repurchases, capital spending, and any further real-estate sale-leasebacks.
- The accounting comparability effects of ASC 606 and the transition to lease accounting, including the expected balance-sheet increase.
- Potential costs and insurance recoveries from the cybersecurity litigation and related claims, plus exposure under lease guarantees.
- Whether restaurant-opening plans and off-premise growth translate into sustainable operating-margin improvement; reported quarter operating margin declined year over year.