Brinker International, Inc. — Form 10-Q Summary
Business context and reporting period. Brinker operates and franchises Chili’s and Maggiano’s. This filing covers the 13 weeks ended December 23, 2020 (fiscal 2021 second quarter) and the 26-week year-to-date period; comparisons are with periods ended December 25, 2019. The company had 1,655 restaurants, including 1,118 company-owned, at quarter-end.
Financial performance and position
- Quarter revenue: $760.7 million, down 12.5% from $869.3 million. Company sales were $746.2 million, down 12.0%; franchise and other revenue was $14.5 million, down 33.5%.
- Quarter profit: Operating income was $22.1 million versus $43.5 million; operating margin was 2.9% versus 5.0%. Net income was $12.0 million versus $27.9 million, and diluted EPS was $0.26 versus $0.73. The quarter’s income tax benefit was $3.8 million.
- Six-month results: Revenue was $1,500.8 million, down 9.3%; operating income was $46.5 million versus $74.7 million; net income was $22.7 million versus $42.8 million; diluted EPS was $0.49 versus $1.12. The tax benefit was $4.3 million.
- Comparable sales: Company-owned comparable restaurant sales fell 12.1% in the quarter: Chili’s declined 6.3% and Maggiano’s 47.0%. For the six months, company-owned comparable sales fell 11.6%. Management attributed declines mainly to reduced dining-room traffic and restrictions, partly offset by off-premise sales.
- Cash flow: Six-month operating cash flow was $130.0 million, down from $142.3 million. Capital expenditures were $37.1 million versus $51.4 million. Cash ended at $64.1 million, up from $43.9 million at fiscal year-end.
- Debt and liquidity: Debt, including finance leases, was $1,155.4 million gross ($1,151.5 million net of issuance costs and discounts); the revolver balance was $406.3 million. Available revolver capacity was $593.7 million. The company reported compliance with debt covenants and expected to remain compliant through fiscal 2021. Current assets were $265.8 million and current liabilities $520.3 million.
- Other metrics: Total assets were $2,357.7 million and shareholders’ deficit was $444.1 million. Restaurant operating lease liabilities totaled $1,151.6 million in present value. Weighted-average diluted shares were 46.1 million versus 38.1 million.
Material changes and management commentary
- COVID-19 continued to weigh on sales and traffic; approximately 80% of company restaurant dining rooms and patios were open at limited capacity at quarter-end. Maggiano’s banquet business was particularly affected.
- Chili’s off-premise sales were approximately 46% of sales in the first half of fiscal 2021. The company cited growth in delivery and takeout, including its DoorDash partnership and virtual brand It’s Just Wings, as an offset to dining-room weakness. Off-premise growth also increased delivery fees and supply costs.
- Food, labor and restaurant expenses were respectively 26.7%, 34.3% and 28.3% of company sales in the quarter, compared with 26.3%, 34.4% and 26.6%. Lower labor and other cost savings were partly offset by sales deleverage and delivery-related expense.
- The company reduced capital spending and costs, and continued suspending its regular cash dividend and share-repurchase program. The board had suspended the quarterly dividend in fiscal 2020; current-period dividends were limited to previously accrued restricted-share dividends.
- Fiscal 2021 projected openings were 17–20 restaurants in total, including 8 company-owned and 9–12 franchised locations. This is an opening projection, not earnings or revenue guidance.
- Management stated that cash from operations and revolver availability should be adequate to fund operations and debt obligations over the next year. It cautioned that the pandemic’s duration, restrictions, staffing effects and consumer response make the financial impact difficult to estimate.
Risks, contingencies and unusual items
- Quarterly other gains and charges were $5.4 million, including $2.5 million of restaurant impairments and $1.0 million of COVID-related costs. The six-month total was $9.2 million.
- The effective tax rate was unusually negative, primarily reflecting the FICA tip tax credit and, for the six-month period, stock-based compensation tax windfalls.
- A putative class action related to a 2018 payment-card data incident seeks damages and other relief. The company said the loss or range of loss was not determinable and recorded no liability; a class-certification hearing was scheduled for February 25, 2021. Management said it intended to defend the matter.
- Lease guarantees or secondary liability were up to $35.5 million; undrawn standby letters of credit totaled $29.5 million. The company also disclosed $53.2 million of deferred payroll taxes under the CARES Act, repayable in installments in 2021 and 2022.
- COVID-19-related closures, capacity limits, supply-chain or staffing disruptions, and continued weak traffic could materially affect results. Management said goodwill impairment indicators were not identified in its second-quarter annual assessment but would continue monitoring conditions.
Important facts for investors to verify
- Whether dining-room capacity, guest traffic and Maggiano’s banquet activity recover, and whether off-premise sales can offset ongoing weakness.
- Cash generation, revolver availability, covenant headroom and the planned facility capacity reduction from $1.0 billion to $900 million in September 2021.
- The sustainability of reported profitability given lower sales, cost deleverage, tax benefits and unusual charges.
- Progress on the data-incident litigation and any change in the company’s assessment of potential loss.
- Whether the dividend and buyback suspensions, restaurant opening plans and management’s liquidity outlook change.
- The effect of the substantially higher weighted-average share count on year-over-year per-share comparisons.