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 weeks and 39 weeks ended March 27, 2013, the third quarter and year-to-date period of fiscal 2013. The company reported 1,588 restaurants in the U.S. and 32 countries and two territories outside the U.S.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | 39 weeks FY2013 | 39 weeks FY2012 |
|---|---|---|---|---|
| Total revenue | $742.8 million | $742.0 million | $2,116.0 million | $2,092.4 million |
| Operating income | $79.3 million | $68.0 million | $187.4 million | $163.5 million |
| Operating margin | 10.7% | 9.2% | 8.9% | 7.8% |
| Net income | $52.0 million | $44.9 million | $117.0 million | $104.2 million |
| Diluted EPS | $0.71 | $0.56 | $1.56 | $1.28 |
Net margin was 7.0% for the quarter versus 6.1% in the prior-year quarter, and 5.5% year to date versus 5.0%. Company restaurant expenses were 82.1% of revenue in Q3 versus 82.8%; cost of sales improved to 27.4% of company sales from 28.1%. Quarterly dividends per share were $0.20 versus $0.16.
Year-to-date operating cash flow was $222.6 million, down from $233.8 million. Investing cash use was $92.2 million, including $98.7 million in capital expenditures; financing cash use was $103.9 million. Cash ended the period at $85.7 million, compared with $59.1 million at June 27, 2012.
Total debt, including current installments, was $704.8 million, up from $615.2 million at fiscal year-end. This included $150 million drawn on the revolver; $100 million of revolver capacity remained available. The company reported compliance with debt covenants. The working capital deficit was $175.7 million.
Material changes versus prior comparable periods
- Quarterly revenue increased 0.1%; excluding a $5.2 million prior-year gift-card breakage estimate adjustment, revenue declined 0.6%, primarily due to lower traffic. Year-to-date revenue increased 1.1%, supported by pricing and favorable mix.
- Q3 company-owned comparable sales declined 0.9%, including a 2.9% traffic decline; system-wide comparable sales declined 0.2%. Year-to-date company-owned comparable sales rose 0.8%, despite a 1.8% traffic decline.
- Q3 earnings and margins improved, aided by lower general and administrative expense and lower food-cost percentage. Interest expense rose to $7.1 million for the quarter and $21.0 million year to date, primarily due to higher borrowing balances.
- Year-to-date operating cash flow decreased, while capital expenditures increased to $98.7 million from $85.2 million. The company drew $110 million on its revolver, primarily to fund repurchases, and repurchased 5.8 million shares for $191.8 million.
Outlook, commentary, risks and unusual items
Management described consumer conditions as cautious and industry sales as soft. It highlighted investments in Chili’s kitchen equipment, operating systems, remodels and menu offerings, and cited Maggiano’s sales growth and margin performance. Management said available operating cash flow and credit capacity should be adequate to fund operations and current debt obligations. Fiscal 2013 capital expenditures were estimated at $130–$140 million, expected to be funded by operating cash flow; projected openings were 32–37 restaurants, primarily international franchises. No earnings or revenue guidance was provided in the filing.
Year-to-date other gains and charges included $0.7 million of restaurant impairment charges, $2.9 million of restaurant closure charges, $1.3 million of severance and benefits, and $2.4 million of net gains primarily from land sales. Subsequent to quarter-end, the company repurchased approximately 420,000 shares for $16 million and sold its 16.6% interest in Romano’s Macaroni Grill for approximately $8.3 million; the sale gain was expected to be recorded in Q4.
Lease guarantees and secondary liabilities totaled $136.8 million, with no material liability recorded. A California meal-and-rest-break class action remained subject to further proceedings; the company said possible loss could not then be reasonably estimated. Management identified competition, economic and consumer weakness, food and labor cost inflation, supply interruptions, litigation, technology and data-security issues, and execution of its strategy among relevant risks. Management stated there had been no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether traffic declines continue, especially at Chili’s, and whether menu, remodel and operational initiatives improve comparable sales.
- Whether cash generation can support the planned capital program, dividends and repurchases while managing increased debt and the working capital deficit.
- The impact of commodity, labor, health-insurance and other operating costs on restaurant margins.
- Developments in the California class action and any exposure under the $136.8 million of lease guarantees.
- Completion and financial impact of the Romano’s Macaroni Grill interest sale and other unusual or nonrecurring items.