Business context and reporting period
Brinker International operates and franchises Chili’s and Maggiano’s. It reported 1,571 restaurants at March 30, 2011. On The Border was sold in June 2010 and is presented as discontinued operations in the prior-year comparisons.
This filing covers Brinker’s fiscal third quarter and first 39 weeks of fiscal 2011, ended March 30, 2011; comparable periods ended March 24, 2010. This differs from the request metadata’s “2010 Q3.” Dollar amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q3 FY2011 | Q3 FY2010 | 39 weeks FY2011 | 39 weeks FY2010 |
|---|---|---|---|---|
| Revenue | $717.1 | $713.4 | $2,043.9 | $2,115.4 |
| Operating income | $61.2 | $49.9 | $144.1 | $91.2 |
| Income from continuing operations | $40.2 | $35.5 | $99.1 | $60.6 |
| Net income | $40.2 | $40.0 | $99.1 | $74.1 |
| Diluted EPS | $0.45 | $0.39 | $1.05 | $0.72 |
- Margins: Q3 operating margin was 8.5% versus 7.0%; net margin was 5.6% in both periods. Year-to-date operating margin was 7.0% versus 4.3%, and net margin was 4.9% versus 3.5%.
- Cash flow: Operating cash flow was $188.2 versus $222.6 year to date. Investing activities used $42.1, compared with $17.7 provided in the prior-year period; capital expenditures were $48.9 versus $31.6. Financing activities used $383.7, including $359.0 of treasury-stock purchases and $41.0 of dividends.
- Liquidity and debt: March 30 cash was $106.9, total current assets $243.2 and current liabilities $394.4, a $151.2 working-capital deficit. Debt totaled $530.1, including current installments. The company had an undrawn $200 million revolving facility, stated it complied with debt covenants, and reported no material change in market risk.
- Capital returns: Brinker repurchased approximately 18.0 million shares for about $357 million in the first 39 weeks. Approximately $258 million remained authorized at quarter-end. The quarterly dividend was $0.14 per share.
Material changes versus prior comparable periods
- Q3 revenue increased 0.5%, while year-to-date revenue declined 3.4%. Q3 Chili’s comparable sales fell 0.3%; Maggiano’s rose 3.4%. Year-to-date comparable sales declined 3.3% at Chili’s and increased 3.3% at Maggiano’s.
- Q3 operating income rose about 23% and continuing-operations income about 13%. Year-to-date continuing-operations income increased about 64%, while reported net income growth was smaller because the prior year included On The Border discontinued-operations income of $13.5 million.
- Year-to-date cost of sales improved to 26.9% of revenue from 28.9%, and restaurant labor improved to 32.2% from 32.6%. Restaurant expenses increased to 24.0% from 23.4% of revenue.
- Year-to-date operating cash flow declined, partly reflecting cash taxes and settlement of On The Border-related liabilities. Cash fell from $344.6 million at June 30, 2010 to $106.9 million at March 30, 2011, with substantial share repurchases and dividends contributing to the reduction.
- Total shares outstanding at quarter-end were 85.2 million, down from 101.6 million at June 30, 2010. The filing reports 84.8 million shares outstanding as of May 2, 2011.
Outlook, management commentary, risks and unusual items
- Management cited a slow economic recovery, cautious consumers, rising fuel costs and potential commodity inflation as business pressures. It highlighted Chili’s service and food-preparation initiatives, kitchen and information-systems upgrades, menu and promotional efforts, and planned restaurant remodels.
- Fiscal 2011 projected capital expenditures were approximately $80 million, expected to be funded from operating cash flow. Planned openings were 33–40 restaurants, mostly international franchised locations. Management said operating cash flow and the available credit facility were adequate for operations and debt obligations.
- Q3 charges included $1.5 million related to litigation and $1.0 million for severance and other benefits. Year-to-date other gains and charges included $4.6 million of severance, $2.7 million of lease-related charges, a $1.7 million net gain on property sales, $1.5 million of litigation expense and $1.1 million of restaurant impairment charges.
- Lease guarantees and secondary liabilities totaled $175.5 million at quarter-end, with no material liability recorded. A California meal-and-rest-break class-action matter remained unresolved; the company said a possible loss or range could not be reasonably estimated. Management did not expect other pending or threatened matters to have a material adverse effect.
- Credit ratings were mixed: S&P BBB- with stable outlook and Moody’s Ba1 corporate-family/Ba2 senior-unsecured ratings, both with stable outlook. Management said reducing leverage remained a priority.
Important facts for investors to verify
- Whether sales and traffic trends at Chili’s improve, and whether Maggiano’s comparable-sales gains persist.
- Whether lower food and labor costs can be sustained amid commodity, fuel and inflation risks, while restaurant expenses remain elevated.
- Cash generation, working-capital needs, debt repayment and leverage after the large repurchases and dividends; confirm available revolver capacity and covenant headroom.
- Progress and returns from the planned capital spending, remodels, technology investments and restaurant openings.
- Developments in the California labor lawsuit, lease guarantees and other contingencies, including any change in estimated exposure.