Brinker International, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended December 28, 2011; comparable periods ended December 29, 2010. Amounts are in U.S. dollars. Brinker owns, operates, develops and franchises Chili’s and Maggiano’s; it reported 1,574 restaurants across the U.S. and 31 countries and two territories.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | 26 weeks FY2012 | 26 weeks FY2011 |
|---|---|---|---|---|
| Revenue | $681.9m | $671.9m | $1,350.3m | $1,326.8m |
| Operating income | $55.9m | $50.5m | $95.5m | $82.8m |
| Net income | $35.7m | $37.5m | $59.3m | $58.9m |
| Diluted EPS | $0.44 | $0.41 | $0.72 | $0.61 |
| Operating margin | 8.2% | 7.5% | 7.1% | 6.2% |
- Q2 revenue rose 1.5%; year-to-date revenue rose 1.8%. System-wide comparable sales increased 2.0% in both periods. Company-owned comparable sales rose 1.7% in Q2 and 1.8% year to date; franchise comparable sales rose 2.6% and 2.3%, respectively.
- Q2 diluted EPS increased despite lower net income, reflecting fewer weighted-average shares following repurchases. Year-to-date net income was nearly flat, while diluted EPS rose as average shares declined.
- Q2 net margin was 5.2%, versus 5.6%; year-to-date net margin was 4.4% in both years. The effective tax rate rose to 29.0% in Q2 and 29.3% year to date, versus 17.5% and 18.6%, principally because prior-year results benefited from resolution of state tax positions.
- Cost of sales increased to 27.1% of revenue in Q2 and 27.2% year to date, from 26.7% in each prior-year period, reflecting higher prices for oils, beef, produce and dairy. Labor and restaurant expense ratios improved, helped by operating efficiencies and lower selected costs.
Cash flow, debt and liquidity
- For the first six months, operating cash flow was $114.2m, versus $70.0m; capital spending was $53.5m, versus $31.8m; investing cash flow was negative $50.1m. Financing cash flow was negative $70.5m, versus negative $273.6m, as share repurchases were lower and the company borrowed $70m under its revised facility.
- Cash declined $6.4m from fiscal year-end to $75.6m. Current assets were $252.7m and current liabilities $422.1m, a working-capital deficit of $169.4m. Management attributed working-capital movements in part to holiday gift-card receivables and liabilities and payment timing.
- Total debt, including current installments and capital leases, was $588.7m at December 28, 2011, up from $524.7m at June 29, 2011; cash less total debt was approximately negative $513.1m. The company had $250m available on its $500m unsecured credit facility, maturing August 2016, and reported compliance with financial covenants.
- Management estimated FY2012 capital expenditures of approximately $130m, expected to be funded entirely from operating cash flow. It targeted a 40% dividend payout ratio. The quarterly dividend increased 14%, from $0.14 to $0.16 per share.
Material changes and management commentary
- Chili’s Q2 comparable sales rose 1.4%, led by traffic and price, partly offset by unfavorable mix. Maggiano’s comparable sales increased 2.8%, with price, traffic and favorable Q2 mix contributing. Franchise sales grew, supported by 22 net additional international franchised restaurants from the prior-year comparison date.
- Management highlighted Chili’s team-service and kitchen initiatives, restaurant technology upgrades, menu/value offerings and a significant FY2012 remodeling program. It said Maggiano’s sales and traffic trends continued to improve. Planned FY2012 openings were 40–45, primarily international franchise restaurants; no company-owned openings were projected.
- The revised credit facility increased capacity from $400m to $500m. The company reported a current borrowing rate of LIBOR plus 1.63% and S&P rating of BBB- with stable outlook; Moody’s ratings were below investment grade, also with stable outlook.
Unusual items, contingencies and risks
- Q2 included $1.1m of impairment charges for ten underperforming restaurants. First-half other charges included $2.4m in lease termination costs for previously closed restaurants, $0.4m in closure-related impairments and $2.5m of litigation charges, partly offset by a $1.3m land-sale gain.
- Outstanding lease guarantees or secondary liabilities were $154.1m, down from $166.1m at fiscal year-end; the company recorded no material liability for them. A California labor-law class action was awaiting a state Supreme Court ruling, expected by the end of April 2012; management said the possible loss could not then be reasonably estimated.
- Management stated that other pending legal matters were not expected to materially adversely affect the company. It cited competition, weak economic conditions and consumer spending, food and energy inflation, supply disruption, regulation, franchisee performance, technology and data security, and asset impairment among key risks. The filing reported no material change in risk factors or market risks.
- Management said cash from operations and credit availability were adequate for operations and current debt obligations. Forward-looking results remain subject to the risks described in the filing.
Investor verification points
- Track whether improved comparable sales and traffic persist, especially at Chili’s, and whether commodity inflation pressures margins.
- Verify delivery and returns from the $130m capital-spending plan, including kitchen upgrades and restaurant remodels, and the expected 40–45 openings.
- Monitor cash conversion and working-capital movements, alongside the effect of continued buybacks and dividends on liquidity, debt and share count.
- Follow debt levels, credit ratings, borrowing costs and covenant headroom under the revised facility.
- Check the California labor case outcome and any resulting exposure, as well as changes in lease guarantees and other contingencies.