Bloomin’ Brands, Inc. — Q3 2020 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 27, 2020; comparisons are with the periods ended September 29, 2019. Bloomin’ Brands operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar. The filing describes severe COVID-19 disruption: dining rooms reopened by quarter-end, but many remained subject to capacity restrictions.
Financial performance and liquidity
| Metric | Thirteen weeks ended September 27, 2020 | Thirty-nine weeks ended September 27, 2020 |
|---|---|---|
| Total revenue | $771.3 million, down 20.3% year over year | $2.358 billion, down about 24.3% year over year |
| Operating income (loss) | $(14.3) million; prior year $22.0 million | $(167.7) million; prior year $147.9 million |
| Net income (loss) | $(17.8) million; diluted loss per share $(0.20) | $(144.6) million; diluted loss per share $(1.69) |
| Restaurant-level operating margin | 10.7%, versus 12.9% | 9.2%, versus 15.1% |
| Operating cash flow | Not presented as a standalone quarterly figure | $55.0 million, versus $180.9 million |
Quarterly comparable sales fell 12.8% in the U.S. and 54.8% at Outback Steakhouse Brazil. U.S. traffic declined 13.6%; Brazil traffic declined 37.6%. Lower traffic and capacity restrictions pressured sales, while delivery-related costs and labor costs weighed on margins. For the thirty-nine-week period, impairment and restaurant-closing charges were $66.2 million, versus $6.9 million a year earlier. The company reported $108.2 million of COVID-related charges for the thirty-nine weeks.
Balance sheet and funding: At September 27, cash and cash equivalents were $160.0 million, with another $2.5 million restricted. Current assets were $298.2 million and current liabilities $839.0 million; reported working-capital deficit was $540.8 million, including unearned revenue and current lease liabilities. Debt, net of discounts and issuance costs, was $1.148 billion, compared with $1.049 billion at year-end 2019. Principal outstanding under the senior secured facilities and 2025 notes totaled $1.216 billion. The company had $425.8 million of unused revolver capacity after letters of credit. Shareholders’ equity fell to $12.6 million from $177.5 million.
Thirty-nine-week investing cash outflow was $56.2 million, including $67.0 million of capital expenditures. Financing provided $99.9 million, chiefly reflecting convertible-note and warrant proceeds, partially offset by debt repayments and other financing costs. Cash, cash equivalents and restricted cash increased by $95.4 million over the period.
Material changes and unusual items
- Revenue and earnings deteriorated substantially year over year, primarily due to COVID-related sales declines, restaurant closures and capacity limits. International results also reflected Brazilian real weakness.
- The company issued $230 million of 5.00% convertible senior notes due 2025, with net proceeds of approximately $221.6 million. The initial conversion price is about $11.89 per share; related hedge and warrant transactions affect potential dilution.
- A May 2020 amendment waived the quarterly leverage covenant for the remainder of 2020 and set revised tests beginning in 2021. It also imposes minimum monthly liquidity of $125 million through March 28, 2021, capital-spending limits and restrictions on dividends and share repurchases.
- The company recorded a full $2.0 million goodwill impairment for its Hong Kong reporting unit and reported COVID-related closure and impairment costs associated with 22 restaurant closures. Transformational-initiative charges were $28.8 million for the thirty-nine weeks.
- The company paid a $0.20-per-share dividend in the first quarter, but suspended subsequent dividends and repurchases. The credit agreement restricts both until after September 26, 2021, subject to covenant compliance.
Outlook, risks and contingencies
Management gave no specific revenue or earnings guidance. It stated that the duration of the pandemic, customer-traffic recovery and future effects on operations, financial condition and liquidity could not be reliably estimated. Management estimated 2020 capital expenditures of approximately $100 million to $110 million, while the credit agreement caps aggregate capital expenditures at $100 million for the four fiscal quarters through March 28, 2021.
Key risks include renewed closures or capacity restrictions, persistently lower dine-in demand, franchisee distress, supply-chain disruption, commodity inflation, foreign-exchange movements, impairment charges and the company’s increased leverage. The company was in compliance with its debt covenants at quarter-end and stated that it expected to remain compliant over the following 12 months, but noted that compliance under revised and later covenant requirements depends on recovery and results. Three notices of default were received for leases of divested restaurant properties for which the company is contingently liable. Potential undiscounted lease-guarantee payments were approximately $29.0 million; the recorded contingent liability was $9.7 million. Management said losses above the reserve were not probable at that time and would continue to be monitored.
Important facts for investors to verify
- Whether restaurant traffic and comparable sales recover, and how much dine-in capacity remains restricted.
- Liquidity headroom against the $125 million minimum and performance against the revised leverage tests beginning in 2021.
- Cash needs and debt-service obligations, including the 5% convertible notes, revolver, interest-rate swaps and potential conversion or warrant dilution.
- Whether lease-guarantee defaults, franchisee distress or restaurant closures result in additional payments, impairment or restructuring charges.
- How the capital-expenditure estimate reconciles with the credit agreement’s $100 million limit, and when dividend and repurchase restrictions may end.