Business context and reporting period
Brinker International, Inc. operates and franchises Chili’s Grill & Bar and Maggiano’s Little Italy, plus virtual brands including It’s Just Wings. This is the Form 10-K for the fiscal year ended June 29, 2022 (FY2022), not a standalone 2021 fourth-quarter report. FY2022 had 52 weeks; FY2021 had 53 weeks, which affects comparisons. At year-end, the system had 1,650 restaurants: 1,188 company-owned and 462 franchised.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $3,804.1 million | $3,337.8 million |
| Operating income | $159.5 million (4.2% of revenue) | $199.3 million (6.0%) |
| Income before taxes | $115.2 million | $145.2 million |
| Net income | $117.6 million | $131.6 million |
| Diluted EPS | $2.58 | $2.83 |
| Operating cash flow | $252.2 million | $369.7 million |
Company sales were $3,712.1 million and franchise and other revenues were $92.0 million. Comparable sales rose 12.3% at company restaurants and 13.2% system-wide; Chili’s company comparable sales increased 8.6% and Maggiano’s increased 53.0%. Comparisons reflect reopening and demand recovery as well as the extra week in FY2021.
Cost pressure reduced profitability: food and beverage costs increased to 28.2% of company sales from 26.4%, and restaurant labor to 34.7% from 33.8%. Menu pricing partly offset inflation. FY2022 included a $2.4 million income tax benefit, versus $13.6 million of tax expense in FY2021; the filing attributes the low effective tax rate primarily to FICA tip credits.
Cash and cash equivalents were $13.5 million at year-end. Capital expenditures were $150.3 million. Investing cash outflow was $234.2 million, including $106.6 million paid to acquire 68 Chili’s restaurants. Debt included $271.3 million drawn on the revolver, $350 million of 5.000% notes and $300 million of 3.875% notes; finance lease obligations were $90.2 million. Revolver availability was $528.7 million, and the company reported compliance with debt covenants. The $300 million 3.875% notes mature in May 2023; management expected to refinance them using revolver availability.
Material changes versus the prior comparable period
- Revenue increased 14.0%, while net income declined 10.6% and operating income declined 20.0%; FY2021’s additional week complicates the comparison.
- Comparable sales increased as dining-room and delivery sales and traffic recovered; To-Go sales were lower. Maggiano’s benefited from stronger dining and banquet activity.
- Food and labor inflation, wage increases, training, overtime and turnover outweighed pricing and sales leverage in key cost lines. Management said inflation increased food and labor costs by high single digits in FY2022.
- Operating cash flow decreased by $117.5 million, including effects from repayment of deferred payroll taxes, higher bonus payments and timing of receipts and payments.
- Brinker reinstated its share repurchase program in August 2021 and repurchased 2.4 million shares for $100.9 million in FY2022. The quarterly cash dividend remained suspended.
Outlook, risks and unusual items
Management expected inflation to be in the mid-teens in FY2023 and cautioned that menu price increases might not fully offset higher costs without affecting demand. It cited labor availability and turnover, supply-chain disruptions and product shortages as ongoing operating challenges. The company planned 18 company-owned Chili’s openings in FY2023 and projected 17–23 franchise openings, primarily international; projections remain subject to change.
Other notable items included $31.2 million of other gains and charges, including $8.3 million of restaurant impairment charges; impairments related primarily to 30 underperforming Chili’s and two Maggiano’s restaurants. Gift-card breakage revenue was $36.1 million, up from $13.0 million, primarily reflecting a change in estimated breakage rates. The independent auditor identified the estimation of gift-card breakage revenue as a critical audit matter.
Risks highlighted include inflation and reduced discretionary spending, labor shortages and rising wages, supply-chain disruption, reliance on third-party delivery and technology, cybersecurity and data privacy, food safety, litigation, and restaurant performance. The company disclosed a pending class-action cybersecurity lawsuit relating to a 2018 incident, seeking damages in excess of $5 million; the loss range was not determinable and no liability was recorded. Lease guarantees and secondary lease liabilities had a maximum potential exposure of $26.3 million, with $2.2 million accrued for estimated exposure. Management said it believed liquidity sources were adequate for operations and near-term debt obligations. The auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Use FY2022 ended June 29, 2022 as the reporting period; it is not a 2021 Q4 filing, and FY2021 had an extra week.
- Assess whether pricing, traffic and sales growth can offset projected mid-teens inflation and labor constraints without weakening demand or margins.
- Review the 68 restaurant acquisitions’ contribution to revenue, cash flow and returns, alongside the related borrowing and lease commitments.
- Monitor the May 2023 notes refinancing, revolver availability, cash generation and covenant headroom.
- Check the assumptions behind the $36.1 million gift-card breakage revenue and the status of the cybersecurity litigation and lease guarantees.