Bloomin’ Brands, Inc. — Q2 2015 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 28, 2015; comparisons are to the corresponding periods ended June 29, 2014. The company operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s, primarily in the U.S. It sold Roy’s in January 2015.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $1.100 billion | $1.111 billion | $2.302 billion | $2.269 billion |
| Operating income | $62.6 million | $62.4 million | $160.3 million | $152.4 million |
| Operating margin | 5.7% | 5.6% | 7.0% | 6.7% |
| Net income attributable to Bloomin’ Brands | $32.2 million | $26.4 million | $92.8 million | $80.1 million |
| Diluted EPS | $0.26 | $0.21 | $0.73 | $0.63 |
| Adjusted diluted EPS (non-GAAP) | $0.28 | $0.27 | $0.82 | $0.72 |
Q2 U.S. comparable sales rose 2.0%; Outback and Fleming’s gains were partly offset by Bonefish Grill’s 4.6% decline. Q2 revenue fell about 1.0%, primarily due to foreign exchange, restaurant closures, the Roy’s sale and weaker Bonefish and South Korea comparable sales. First-half revenue increased about 1.4%, including $24.3 million from two additional operating days.
For the first half, operating cash flow was $197.4 million, compared with $97.2 million a year earlier; investing cash use was $89.3 million and financing cash use was $139.1 million. Cash declined $33.0 million to $132.8 million. Management attributed stronger operating cash flow primarily to timing of gift-card receivables, tax and interest payments, and accounts-payable payments; it was partly offset by increased inventory purchases and gift-card redemptions.
Financial position and capital allocation
- At June 28, cash and cash equivalents were $132.8 million; current assets were $446.5 million and current liabilities $702.5 million, producing a $256.0 million working-capital deficit. Current liabilities included $258.5 million of unredeemed gift-card revenue. Management said negative working capital is common in the restaurant business and expected liquidity sources to cover anticipated needs for the next 12 months.
- Long-term debt, net, was $1.295 billion; total reported debt before discounts and current classification was approximately $1.325 billion. The company had $225.4 million of unused revolver capacity after letters of credit. It was in compliance with debt covenants.
- First-half capital expenditures were $114.3 million; management estimated 2015 capital expenditures of $225–$235 million. The company paid $14.8 million in dividends and repurchased $100 million of stock under its 2014 authorization. A new authorization for up to $100 million was approved in August 2015; no purchases had been made under it by filing.
Changes, outlook and risks
- U.S. segment revenue rose to $983.0 million in Q2, while International revenue declined to $116.6 million, substantially affected by currency translation and restaurant closures. U.S. operating margin improved; International operating income declined year over year.
- Management cited restaurant-level productivity savings, stronger U.S. volumes and pricing as supports to operating performance, offset by beef and other commodity inflation, wage costs, lunch expansion and higher corporate expenses. Bonefish development was to be slowed until sales improve.
- The company increased its revolving facility from $600 million to $825 million and used it to repay the $225 million Term Loan B. It entered into $400 million of interest-rate swaps, effective June 30, 2015, fixing the relevant rate at a weighted average 2.02% through May 2019.
- Management expected $5–$7 million of future cash expenditures through August 2022, primarily for leases associated with international restaurant closures, and approximately $1 million of additional closure charges through Q3 2015. Thirty-five of 36 planned international closures had occurred by quarter-end.
- Risk factors include consumer demand and competition, food and labor cost inflation, foreign exchange exposure, leverage and variable-rate debt, and legal and regulatory matters. A 10% currency-rate change was estimated to affect first-half foreign-entity revenue by $28.3 million and net income by $1.4 million. The company does not hedge currency exposure. A wage-and-hour collective action remained pending; the company said it could not estimate a reasonably possible loss range.
- An IRS adjustment of $3.3 million related to employer FICA taxes on alleged unreported employee tips was issued in May. Accrued payroll-tax audit liabilities were $9.3 million at quarter-end. The company also disclosed nominal Roy’s lease guarantees and said related lease contingencies were satisfactorily resolved in July.
Key facts for investors to verify
- Whether U.S. sales momentum can offset continued weakness at Bonefish Grill and in South Korea, and the effects of foreign exchange and closures.
- Whether restaurant-level margin improvements persist despite commodity, wage and insurance cost pressures.
- Cash-flow sustainability: first-half operating cash flow benefited from timing items, while planned capital spending is $225–$235 million for 2015.
- Debt, revolver availability, refinancing and covenant headroom, including exposure to variable interest rates and the 2017 CMBS maturity.
- Potential cash costs from restaurant closures, the payroll-tax audit and the pending wage-and-hour litigation.
- Whether dividends and the newly authorized share repurchases remain supportable alongside investment and debt obligations.