Bloomin’ Brands, Inc. — Q3 2016 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 25, 2016; comparisons are with the periods ended September 27, 2015. The unaudited filing covers a restaurant operator and franchisor whose concepts include Outback Steakhouse, Carrabba’s, Bonefish Grill and Fleming’s.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Total revenue | $1,005.4m | $1,026.7m | $3,248.2m | $3,328.4m |
| Operating income | $31.7m | $38.7m | $131.8m | $199.0m |
| Net income attributable to Bloomin’ Brands | $20.7m | $16.8m | $46.0m | $109.6m |
| Diluted EPS | $0.18 | $0.13 | $0.40 | $0.87 |
| Operating margin | 3.2% | 3.8% | 4.1% | 6.0% |
| Operating cash flow | — | $223.6m | $247.3m |
- Q3 revenue fell 2.1%, primarily reflecting the July sale of South Korean Outback restaurants; company-reported U.S. comparable sales declined 0.7% and U.S. traffic fell 5.4%. Q3 net income attributable to the company rose despite lower operating income, aided in part by lower interest expense and a lower effective tax rate.
- For the first 39 weeks, operating income and attributable net income fell materially. Results included a $39.6m impairment associated with the South Korea sale and a $27.0m debt defeasance, extinguishment and modification loss.
- Q3 restaurant-level operating margin was 14.4% on a U.S. GAAP basis, versus 14.8% a year earlier; the filing also presents adjusted measures. Labor costs rose as a share of restaurant sales, while food costs declined as a share.
Balance sheet, liquidity and capital allocation
- At September 25, 2016, cash and cash equivalents were $91.5m; total debt, net, was $1,225.6m, including $39.6m current and $1,186.1m long-term. The company had $151.2m of unused revolving capacity, net of letters of credit.
- Working capital was negative $423.7m, including $242.4m of unearned gift-card revenue. Management said negative working capital is common in the restaurant business and cited cash collected before many current obligations come due.
- Operating cash flow was $223.6m. Investing activities provided $176.1m, including $320.3m of net sale-leaseback proceeds; financing activities used $445.8m. Cash declined by $40.9m from year-end 2015.
- The company sold 88 restaurant properties in sale-leasebacks during the period for $326.5m gross proceeds and recorded a $97.2m deferred gain. It subsequently sold 59 more properties for $187.0m gross proceeds and used $121.9m to repay the PRP mortgage loan. Sale-leasebacks provide cash but create ongoing lease obligations.
- Debt covenants were reported in compliance at period-end. The company had repurchased 14.8m shares for $274.9m during the 39 weeks and declared $0.21 per share in dividends. A $0.07 quarterly dividend was declared for payment in November 2016.
Material changes, outlook and risks
- South Korea divestiture: The company sold its 72 Outback restaurants in South Korea for $50.0m cash; the locations became franchised. The sale reduced reported revenue, generated a $2.1m gain in Q3, and was associated with the $39.6m impairment recorded earlier in 2016.
- Debt refinancing: The company defeased its 2012 CMBS loan using a new PRP mortgage loan and revolving-credit borrowings. The PRP loan had a February 2018 initial maturity, with a conditional one-year extension. After the subsequent repayment, $50.9m remained due at initial maturity unless extended.
- Management outlook: 2016 capital expenditures were estimated at $235m–$255m; expected fiscal 2017 commodity costs were flat to 1% lower. Management estimated a 28%–29% effective tax rate for fiscal 2016 and $9.0m of incremental fiscal 2017 expense from the Department of Labor overtime-threshold regulations. The filing provides no clear full-year revenue or earnings guidance.
- Restructuring and contingencies: The company planned to close 14 Bonefish restaurants, with closures substantially complete by Q1 2019; estimated future cash expenditures were $10.1m–$12.3m through October 2024. A tentative $3.2m settlement in the Cardoza wage-and-hour litigation had conditional court approval, with final approval expected in Q4 2016. Recorded liabilities for legal matters were $4.2m.
- Principal risks: Management highlighted consumer spending and traffic, competition, food safety, wage and commodity inflation, foreign exchange and international conditions, variable-rate debt and leverage, restrictive covenants, technology and data security, and the ability to sustain cash flow, dividends and repurchases. Management stated expected liquidity was adequate for at least 12 months, subject to revenue, cash-flow and cost-management performance.
Most important facts for investors to verify
- Whether U.S. traffic and comparable sales stabilize, given Q3 traffic declines and weaker year-to-date U.S. comparable sales.
- How much reported earnings pressure reflects recurring restaurant operations versus South Korea impairment, debt-refinancing costs and other adjustments.
- Debt maturities, revolving-facility availability, covenant headroom and the PRP loan’s remaining balance and extension conditions.
- The long-term rent and cash-flow effects of the 147 restaurant-property sale-leasebacks completed by the filing date.
- Execution and final costs of Bonefish closures, the Cardoza settlement, and the stated capital expenditure and tax-rate outlook.