Bloomin' Brands, Inc. — Q1 2016 Form 10-Q
Reporting period: Thirteen weeks ended March 27, 2016; compared with the thirteen weeks ended March 29, 2015. Bloomin' Brands operates Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill and Fleming's, with U.S. and International reporting segments.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $1,164.2 million | $1,202.1 million | Down 3.2% |
| Income from operations | $86.7 million | $97.7 million | Down $11.0 million |
| Operating margin | 7.4% | 8.1% | Down 0.7 percentage points |
| Net income attributable to Bloomin' Brands | $34.5 million | $60.6 million | Down $26.1 million |
| Diluted EPS | $0.29 | $0.47 | Down $0.18 |
| Adjusted diluted EPS (non-GAAP) | $0.47 | $0.54 | Down $0.07 |
| Operating cash flow | $130.7 million | $96.0 million | Up $34.8 million |
| Capital expenditures | $43.6 million | $47.7 million | Down $4.1 million |
Restaurant-level operating margin was 17.8%, versus 18.4% a year earlier. Cost of sales remained 32.4% of restaurant sales; labor costs rose to 27.9% from 27.1%. The effective tax rate was 24.0%, compared with 25.5%.
Cash and cash equivalents were $128.8 million at quarter-end, including $66.5 million held by foreign affiliates. Current liabilities of $803.1 million exceeded current assets of $300.7 million, producing a working-capital deficit of $502.4 million; unearned gift-card revenue was $279.6 million. Management said operating cash flows and the timing of restaurant receipts support the company's ability to operate with negative working capital.
Total debt, net of discounts and issuance costs, was $1,325.8 million, including $113.4 million classified as current. The company had $188.2 million of available unused revolving-credit capacity, net of letters of credit, and reported compliance with debt covenants.
Material changes and drivers
- Revenue fell mainly because of the weaker Brazilian real, U.S. comparable restaurant sales declining 1.5%, and restaurant closures. New openings partly offset the declines. U.S. traffic fell 2.2%; combined U.S. comparable sales had risen 3.6% in the prior-year quarter.
- U.S. segment revenue declined to $1,043.8 million from $1,062.0 million; segment operating income declined to $117.8 million from $128.3 million. International revenue decreased to $120.4 million from $140.0 million, while International operating income increased to $11.3 million from $8.9 million, primarily due to lower closure and impairment costs.
- Operating income was pressured by weaker restaurant-level margins and higher general and administrative expenses. Lower impairment and closure costs provided a partial offset.
- Net income included a $26.6 million pretax loss from defeasance, extinguishment and modification of debt. The company reported adjusted net income of $56.7 million and adjusted diluted EPS of $0.47; these are non-GAAP measures.
- Operating cash flow improved, primarily reflecting the timing of gift-card receivable collections and rent payments and lower income-tax payments. Financing cash use included debt transactions, $75.0 million of share repurchases and $8.2 million of dividends.
Outlook, financing, risks and unusual items
- In February, the company borrowed $300.0 million under a new property-secured mortgage loan and used the proceeds, together with revolving-credit borrowings, to prepay and defease its 2012 CMBS debt. Management anticipated approximately $12.0 million of interest savings in fiscal 2016. The new variable-rate loan had an initial maturity in February 2018, subject to an extension option and specified repayment terms.
- After quarter-end, the company sold 41 restaurant properties for gross proceeds of $141.4 million and leased them back. It subsequently paid $87.6 million on the mortgage loan and $44.5 million on the revolving facility, primarily using sale-leaseback proceeds.
- Management estimated 2016 capital expenditures of $235 million to $255 million and stated that available liquidity was expected to meet obligations for at least the next 12 months, subject to revenue, cash flow, cost and working-capital performance.
- The company decided to close 14 Bonefish restaurants, with closures expected to be substantially complete by Q1 2019. It recognized approximately $3.6 million of related pretax costs and estimated future cash expenditures of $11.1 million to $13.4 million through October 2024.
- The Board authorized a $250 million share-repurchase program expiring August 12, 2017; $75.0 million had been repurchased by quarter-end. The company declared a subsequent quarterly dividend of $0.07 per share.
- Risks identified include consumer spending and traffic, competition, food safety, wage and commodity cost increases, foreign currency and international conditions, interest rates and substantial leverage, and the ability to comply with debt covenants. The company disclosed a tentative $3.2 million settlement of an employee wage-and-hour matter, conditionally approved by the court, with final approval still pending.
Most important facts for investors to verify
- Whether comparable sales and customer traffic stabilize, particularly at U.S. brands with Q1 declines.
- Actual performance of the 2016 debt refinancing and property sale-leaseback, including interest savings, lease costs, and scheduled mortgage repayments.
- Progress on Bonefish closures and whether total restructuring cash costs remain within estimates.
- Liquidity, leverage and covenant headroom as the company funds planned capital expenditures, debt service, dividends and repurchases.
- Final court approval and financial resolution of the wage-and-hour settlement.