Brinker International, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2016 second quarter, the 13 weeks ended December 23, 2015; year-to-date figures cover 26 weeks. Brinker operates and franchises Chili’s Grill & Bar and Maggiano’s Little Italy, with 1,646 restaurants at quarter-end.
Financial performance
| Metric | Quarter | First six months |
|---|---|---|
| Total revenue | $788.6 million, up 6.2% | $1,551.2 million, up 6.7% |
| Operating income | $75.6 million; 9.6% margin | $131.9 million; 8.5% margin |
| Net income | $47.7 million, versus $41.3 million | $80.9 million, versus $74.0 million |
| Diluted EPS | $0.80, versus $0.64 | $1.34, versus $1.13 |
| Operating cash flow | Not presented separately | $155.6 million, versus $162.5 million |
Quarterly company sales increased 6.7%, while franchise and other revenue fell 8.8%. Company-owned comparable sales declined 2.6%: Chili’s fell 2.8% and Maggiano’s fell 1.8%. System-wide comparable sales declined 1.6%, with traffic a major weakness. The 103 Chili’s restaurants acquired from Pepper Dining added capacity and sales; their reported revenue was approximately $62.2 million for the quarter and $124.0 million year to date.
As a share of company sales, cost of sales improved to 26.6% from 27.0%, while restaurant labor increased to 32.4% from 31.7%, primarily due to wage-rate increases. Restaurant expenses were flat at 24.9%. The higher quarterly operating margin also reflects substantially lower other gains and charges than in the prior-year quarter.
Cash, debt, and capital allocation
- Cash was $71.3 million at December 23, 2015. Six-month capital expenditures were $52.2 million; the Pepper Dining acquisition used $105.6 million net of acquired cash.
- Total debt was approximately $1.16 billion, up from $974.3 million at June 24, 2015. Revolver borrowings were $571.3 million; $178.8 million remained available under the $750 million facility. The company reported compliance with debt covenants.
- Six-month financing included $140.1 million of treasury-stock purchases and $37.4 million of dividends. The quarterly dividend rose 14%, from $0.28 to $0.32 per share. After quarter-end, Brinker borrowed a further $20 million and repurchased approximately 1.9 million shares for $91 million.
- Shareholders’ deficit widened to $164.9 million from $78.5 million, reflecting the company’s substantial treasury-stock balance and ongoing repurchases.
Outlook, commentary, and notable items
- Management said competition, industry discounting, limited consumer discretionary income, and wage pressure challenged sales and traffic. It described investments in menu offerings, restaurant operations, tabletop technology, mobile wait-list functionality, online ordering, and rewards as elements of its sales and guest-experience strategy.
- Fiscal 2016 projected openings were 46–55 restaurants in total, including 13–15 company-owned and 33–40 franchised locations. Management stated that operating cash flow and available credit were adequate to fund operations and current debt obligations for the foreseeable future. No specific earnings or revenue guidance was provided in the filing text.
- Quarterly other gains and charges were a net gain of $87,000, including a $2.0 million settlement recovery from a supplier litigation matter, partly offset by a $1.2 million reserve related to a bankrupt franchisee and impairment charges. The prior-year quarter included a $5.8 million charge for a separate litigation settlement.
- Maximum potential lease-guarantee exposure was $77.7 million; no material liability was recorded. The company had $25.2 million of undrawn standby letters of credit. Management said pending or threatened legal matters were not expected to materially adversely affect financial condition or results.
- Management identified ongoing risks including competition, slow economic growth, food and labor cost inflation, consumer demand, supply interruptions, litigation, information-technology and data-security matters, and restaurant asset impairment. It reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether negative comparable sales and traffic improve, particularly at Chili’s, and whether promotional activity supports profitable growth.
- Whether the Pepper Dining acquisition delivers expected sales and profit benefits while replacing lost franchise royalties.
- How higher wages, commodity costs, and acquired-restaurant depreciation affect restaurant margins.
- Whether continued borrowing, dividends, and share repurchases remain consistent with liquidity, leverage, and the stated investment-grade objectives.
- Developments in lease guarantees, franchisee-related exposures, and litigation contingencies.