EAT

Brinker International, Inc. - 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 26, 2008 (Fiscal Q3 2008) and the thirty-nine week period ended March 26, 2008. Brinker International operates four restaurant brands: Chili's Grill & Bar, Romano's Macaroni Grill, On The Border Mexican Grill & Cantina, and Maggiano's Little Italy. Beginning in Q1 2008, the Macaroni Grill brand has been classified as discontinued operations pending its sale.

Key Financial Metrics

Note: Net loss for the quarter was driven by a $56.1 million loss from discontinued operations (Macaroni Grill), primarily due to a $73.1 million impairment charge.

Material Changes vs. Prior Period

• Revenue Decline: Revenues from continuing operations decreased 3.9% in the quarter and 1.5% year-to-date compared to the prior year. This was primarily due to a 6.7% reduction in capacity (average-weighted sales weeks) resulting from the sale of 172 company-owned restaurants to franchisees since Q3 2007.
• Comparable Sales: Comparable restaurant sales increased 1.1% in the quarter, driven by a 1.6% increase at Chili's, partially offset by declines at On The Border and Maggiano's. Guest traffic declined across all brands.
• Margin Pressure: Cost of sales increased to 28.9% of revenue (from 28.4% prior year) due to higher commodity costs (beef, cheese, dairy). Restaurant expenses rose to 56.1% (from 55.5%) due to higher labor and supply costs.
• Restructuring Charges: The company recorded $26.3 million in "Other gains and charges" for the quarter, including $9.0 million for closing 21 underperforming restaurants, $12.1 million for development write-offs, and $5.2 million in severance costs.
• Discontinued Operations: Macaroni Grill recorded a $73.1 million impairment charge to write down net assets to fair value less costs to sell, reflecting difficulties in securing financing due to credit market contraction.

Guidance, Outlook, and Risks

• Strategic Shift: Management is reducing domestic company-owned development, projecting only ~70 openings in fiscal 2008, ~15 in 2009, and fewer in 2010. The focus is shifting to franchise growth and optimizing existing restaurant performance.
• Cost Outlook: The company expects continued volatility in commodity markets and rising labor costs. General and administrative expenses are expected to decrease by approximately $15 million in fiscal 2009 due to recent restructuring.
• Liquidity: The company maintains a $400 million term loan and a $100 million uncommitted credit facility. Management believes cash flows and credit facilities are adequate to fund operations and debt obligations.
• Risks: Key risks include the inability to complete the sale of Macaroni Grill on favorable terms due to credit market conditions, continued inflation in food and labor costs, and competitive pressures in the casual dining sector.

Investor Verification Checklist

• Macaroni Grill Sale Status: Verify the progress of negotiations with potential buyers and the impact of credit market conditions on the expected sale in fiscal 2009.
• Commodity Hedging: Assess the company's ability to pass on rising food costs (beef, dairy) to consumers without further eroding guest traffic.
• Franchise Growth: Monitor the rate of franchise restaurant openings to ensure they offset the decline in company-owned capacity.
• Restructuring Savings: Track the realization of the projected $15 million in annual G&A savings from the corporate restructuring.
• Debt Covenants: Review the terms of the $400 million term loan and credit facilities to ensure compliance with leverage ratios given the recent impairment charges.