Brinker International, Inc. — Fiscal 2014 Second-Quarter 10-Q
Business and period: Brinker operates and franchises Chili’s Grill & Bar and Maggiano’s Little Italy. The quarter was the 13 weeks ended December 25, 2013; year-to-date figures cover 26 weeks. The company had 1,602 restaurants at quarter-end.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding fiscal 2013 periods.
| Metric | Quarter | Year to date |
|---|---|---|
| Total revenue | $704.4, up 2.1% from $689.8 | $1,388.3, up 1.1% from $1,373.3 |
| Operating income | $64.3, up from $61.6 | $113.3, up from $108.1 |
| Net income | $39.7, up from $37.2 | $69.0, up from $65.0 |
| Diluted EPS | $0.58, versus $0.50 | $1.00, versus $0.86 |
| Operating margin | 9.1%, versus 8.9% | 8.2%, versus 7.9% |
| Net margin | 5.6%, versus 5.4% | 5.0%, versus 4.7% |
Quarterly company sales rose 2.3%, supported by capacity and positive comparable sales; franchise and other revenue declined 2.9%. System-wide comparable sales increased 0.5% in the quarter, but decreased 0.4% year to date. Company-owned comparable sales were down 0.3% year to date, with traffic down 2.3%; price increases partly offset traffic declines.
Cost of sales declined to 27.1% of company sales from 27.6% in both reported comparison periods. Restaurant labor also improved, to 32.1% for the quarter and 32.5% year to date, while restaurant expenses increased to 24.8% and 25.0%, respectively. Management cited menu mix, pricing, waste control and kitchen productivity as favorable factors; advertising, insurance and strategic-initiative costs pressured restaurant expenses.
Cash flow, debt and liquidity
- For the first six months, operating cash flow was $147.3 million, versus $131.3 million. Capital expenditures were $69.7 million; investing cash outflow was $68.9 million.
- Cash was $62.7 million at December 25, 2013. Debt totaled $834.0 million, including $27.7 million of current installments; long-term debt less current installments was $806.2 million.
- The company had $210 million available under its revolving credit facility and was in compliance with debt covenants. Its working capital deficit was $181.8 million.
- Financing cash outflow was $75.2 million, including $93.1 million of share repurchases and $31.3 million of dividends, partly offset by net revolver borrowing. The quarterly dividend rose 20%, from $0.20 to $0.24 per share.
Outlook, management commentary and notable items
- Management estimated fiscal 2014 capital expenditures of $150 million to $160 million, expected to be funded entirely from operating cash flow. It projected 45–54 restaurant openings for the year, including 9–14 company-owned and 36–40 franchise locations.
- No full-year earnings or revenue guidance was provided. Management said operating cash flow and available credit were adequate for foreseeable operations and debt obligations, and targeted a 40% dividend payout ratio.
- Management described casual-dining sales and traffic as soft amid a slow economic recovery. Initiatives include Chili’s reimaging, kitchen equipment and software upgrades, menu changes, and international expansion. It expected to reimage about 75% of company-owned Chili’s restaurants by fiscal year-end.
- Second-quarter other gains and charges included $1.3 million of restaurant impairment charges, $0.3 million of closure charges and a $0.6 million gain primarily from land sales. The company also reported acquiring 11 Alberta Chili’s restaurants in June 2013 for $24.6 million.
- Lease guarantees and secondary lease liability had a maximum potential exposure of $127.4 million; no material liability was recorded. In a California wage-and-hour case, the company said a loss was reasonably possible but could not be estimated; it intends to continue its defense.
- Management identified risks including competition, weak consumer demand, food and other cost inflation, supply interruptions, regulatory changes, litigation, technology and data-security risks, and possible restaurant asset impairments. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-sales and traffic trends improve, particularly at Chili’s, and whether growth remains driven by capacity rather than traffic.
- Whether the planned $150–$160 million capital program, restaurant openings and reimaging deliver expected sales and productivity benefits.
- Debt and revolver usage alongside continued share repurchases and dividends; confirm covenant compliance and liquidity as capital returns continue.
- Developments in the California labor litigation and any change in the presently unestimable potential loss, as well as exposure under lease guarantees.
- Whether commodity, labor, advertising and insurance costs offset reported improvements in food and labor ratios.