Business context and reporting period
Brinker International, Inc. operates and franchises Chili’s Grill & Bar and Maggiano’s Little Italy. This Form 10-Q covers the 13-week quarter and 26-week year-to-date period ended December 25, 2019 (fiscal Q2 2020), compared with periods ended December 26, 2018. At quarter-end, Brinker operated or franchised 1,675 restaurants, including 1,117 company-owned and 558 franchised locations.
On September 5, 2019, Brinker acquired 116 previously franchised Midwest Chili’s restaurants for a stated purchase price of $99.0 million, funded with credit-facility borrowings. The acquired restaurants contributed $70.9 million of company sales in the quarter and $86.2 million year to date. Brinker expects approximately $300 million of annualized sales, partly offset by about $22 million of annualized royalties and advertising revenue no longer received.
Financial performance and liquidity
Amounts are in millions except per-share data. Growth rates are calculated from reported figures.
| Metric | Quarter ended Dec. 25, 2019 | Prior-year quarter | 26 weeks ended Dec. 25, 2019 | Prior-year 26 weeks |
|---|---|---|---|---|
| Total revenue | $869.3 | $790.7 | $1,655.3 | $1,544.5 |
| Operating income | $43.5 | $49.6 | $74.7 | $96.5 |
| Operating margin | 5.0% | 6.3% | 4.5% | 6.2% |
| Net income | $27.9 | $32.0 | $42.8 | $58.4 |
| Diluted EPS | $0.73 | $0.83 | $1.12 | $1.46 |
| Operating cash flow | Not reported here by quarter | $142.3 | $56.2 |
Quarter revenue increased about 9.9%, while operating income fell about 12.3% and net income fell about 12.8%. Year-to-date revenue rose about 7.2%, but operating income and net income declined. Quarter comparable sales were up 2.0% at Chili’s and down 1.4% at Maggiano’s; system-wide comparable sales increased 1.0%. Quarter company-owned comparable sales increased 1.5%, reflecting 1.4% price and 0.3% mix, partly offset by 0.2% lower traffic.
Quarter restaurant costs as a percentage of company sales included food costs of 26.3%, labor of 34.4%, and other restaurant expenses of 26.6%. Labor pressure included higher hourly wages and taxes. Improved restaurant expense leverage was partly offset by costs associated with growth in off-premise sales. Quarterly other gains and charges were $12.3 million, versus $2.2 million in the prior-year quarter.
For the 26 weeks, operating cash flow was $142.3 million; investing cash flow was negative $145.9 million, including $96.2 million paid for the acquisition and $51.4 million of property and equipment spending. Financing cash flow was positive $2.2 million. The year-over-year operating cash-flow increase primarily reflected $67.1 million of sale-leaseback-related tax payments in the prior-year period and $14.0 million of tax refunds received in fiscal 2020.
Cash was $12.0 million at December 25, 2019. The revolving facility had $570.3 million drawn and $429.7 million available; net borrowings for the 26 weeks were $47.0 million. Reported long-term debt and finance leases, less current installments, were $1,290.2 million. Brinker reported compliance with debt covenants. Operating lease liabilities were $1,292.0 million, with $1,377.3 million of total lease liabilities including finance leases. Current liabilities were $552.4 million and current assets were $224.3 million.
Material changes and unusual items
- The acquired restaurants boosted company sales and restaurant capacity, while reducing franchise royalties and related revenue. Acquisition-related costs were included in other gains and charges.
- Brinker adopted ASC 842 leases in fiscal 2020. It recognized operating lease assets and liabilities, including $1,175.9 million of operating lease assets at quarter-end. Adoption increased retained earnings by $195.9 million through a cumulative adjustment and did not significantly affect reported income or cash flow. Prior-year statements were not restated, limiting balance-sheet comparability.
- Prior-year results included sale-leaseback gains of $4.4 million for the quarter and $17.7 million year to date; no comparable gains were recorded in the current periods. Current-period other charges included $4.6 million of restaurant impairments, closure costs, acquisition costs, and remodel costs. Impairments primarily involved 10 underperforming Chili’s locations.
- Shares outstanding declined year over year, and diluted weighted-average shares fell to 38.1 million from 38.8 million in the quarter and 39.9 million year to date. The company paid quarterly dividends of $0.38 per share and declared another $0.38 dividend for payment in March 2020.
Outlook, management commentary, and risks
Management projected 39–47 restaurant openings for fiscal 2020: 9–11 company-owned and 30–36 franchised. It said available credit and expected operating cash flows should be adequate to fund operations and current debt obligations. The filing does not provide numerical earnings or comparable-sales guidance.
Management highlighted value offers, menu improvements, digital ordering, delivery, and loyalty marketing as priorities. Chili’s had more than 7.2 million active loyalty members. Brinker described continued investment in off-premise and digital capabilities and international franchise development.
Risks include competition, consumer preferences and spending, wage and commodity inflation, labor availability, delivery and technology execution, cybersecurity, litigation, franchisee performance, and potential asset impairment. A putative class action related to the 2018 Chili’s payment-card incident seeks damages exceeding $5 million, among other relief. Brinker said the loss was not determinable and recorded no liability; it expects possible future legal and professional costs. The company also had $40.9 million of maximum potential liability under lease guarantees and $27.2 million of undrawn standby letters of credit. Management stated that other pending legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- How much of revenue growth and restaurant-capacity growth is attributable to the 116 acquired locations, and whether their expected sales and economics are achieved.
- Whether comparable-sales trends, particularly Maggiano’s negative comps and Chili’s traffic, improve, and whether wage, commodity, and off-premise costs pressure margins.
- The recurring earnings trend after separating current impairment, closure, and acquisition charges from prior-year sale-leaseback gains.
- Debt, lease obligations, revolver availability, covenant compliance, and the effect of continued dividends or repurchases on liquidity.
- Developments in the payment-card litigation, insurance recoveries, and any changes to the estimate of potential cyber-related costs.