Bloomin’ Brands, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Bloomin’ Brands operated or franchised 1,508 restaurants across its Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s and Roy’s concepts.
Financial performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $4.129 billion | $3.988 billion |
| Income from operations | $225.4 million | $181.1 million |
| Net income attributable to Bloomin’ Brands | $208.4 million | $50.0 million |
| Diluted EPS | $1.63 | $0.44 |
| Operating margin | 5.5% | 4.5% |
| Operating cash flow | $377.3 million | $340.1 million |
| Cash and cash equivalents at year-end | $209.9 million | $261.7 million |
| Total debt, gross | $1.429 billion | $1.508 billion |
Revenue rose 3.5%, including $98.0 million from restaurants outside the comparable-sales base and $23.2 million from one month of consolidated Brazilian operations. Comparable sales for the core domestic concepts combined increased 1.2%, versus 3.7% in 2012. Reported earnings included a $36.6 million noncash gain from remeasuring the previously held Brazilian investment and a $52.0 million income-tax benefit from releasing part of the U.S. deferred-tax valuation allowance. Adjusted net income, a non-GAAP measure, was $142.4 million versus $114.0 million; adjusted diluted EPS was $1.11 versus $0.99.
Restaurant-level operating margin was 15.5% under GAAP, or 15.9% after excluding the payroll-tax audit contingency. Food and beverage costs were 32.6% of restaurant sales, up from 32.5%; management cited commodity inflation, partly offset by savings and menu pricing. Cash used in investing activities was $346.1 million, including $237.2 million of capital expenditures and $100.3 million net cash for the Brazil acquisition. Cash declined by $51.8 million during the year.
Fourth-quarter results and material changes
Fourth-quarter revenue was $1.051 billion, compared with $998.4 million in Q4 2012. Operating income was $31.1 million versus $53.6 million; net income attributable to Bloomin’ Brands was $59.0 million versus $18.4 million, and diluted EPS was $0.46 versus $0.15. Q4 2013 included the $36.6 million Brazil remeasurement gain, approximately $18.7 million in impairment charges for planned restaurant closures, and $12.0 million of additional payroll-tax audit expense. The comparison is therefore affected by significant unusual items.
The company acquired a controlling interest in its former Brazilian joint venture on November 1, 2013, raising its ownership to 90%. The $110.4 million cash acquisition added 47 restaurants to company-owned operations; only one post-acquisition month was consolidated in FY 2013. The acquisition also contributed $135.7 million of goodwill and $86.6 million of intangible assets.
Bloomin’ Brands closed nine locations during 2013 and decided to close 22 underperforming restaurants, primarily Outback locations, largely by the end of Q1 2014. It recorded approximately $18.7 million of related impairment charges and expected about $5.0 million of additional lease and closing costs in 2014.
Liquidity, debt and capital commitments
- Year-end current assets were $484.0 million and current liabilities were $744.5 million; reported working capital was negative $260.5 million. Management said negative working capital is typical for the business, citing advance customer receipts and relatively low inventory needs.
- Unused revolving-credit capacity was approximately $193.4 million after letters of credit. The company reported compliance with debt covenants at year-end.
- Gross debt included $935.0 million under the term loan and $484.5 million under the commercial mortgage-backed loan. Approximately $983.7 million of debt was variable-rate; a one-percentage-point rate increase was estimated to raise annual cash interest by approximately $9.8 million.
- Future minimum operating lease payments totaled $966.2 million. Management estimated 2014 capital expenditures of $250–$280 million.
- Operating cash flow increased to $377.3 million from $340.1 million. No regular common-stock dividend was planned.
Outlook, commentary and risks
- Management expected 55–60 system-wide openings in 2014, approximately half domestic and half international, with Bonefish Grill a leading domestic development priority and Brazil the top international priority.
- Management expected lower net income in Q1 2014 than in the prior-year quarter, citing lower comparable-sales trends, unfavorable weather and higher marketing- and initiative-related restaurant costs; timing of the annual managing-partner conference partly offsets those pressures.
- The company expected a 2014 effective tax rate of 27%–29%, above 2013’s unusually low reported rate, which benefited from the valuation-allowance release.
- Commodity costs increased approximately 3.2% in 2013. More than 90% of U.S. beef purchases came from four suppliers, creating concentration and supply-disruption exposure. The company also faces labor-cost, consumer-spending, competitive, food-safety, foreign-exchange and weather risks.
- The IRS proposed an employer FICA adjustment for alleged unreported employee cash tips. The company recorded $17.0 million for 2010–2012; tax benefits offset the expense in 2013, leaving no reported net-income impact. The company expected cash settlement over the next two years. South Korean authorities assessed approximately $7.9 million in additional taxes; the company was appealing and had deposited the assessment.
- Two wage-and-hour matters were disclosed: a purported nationwide Outback collective action and a California class action involving a franchisee. Outcomes were uncertain. Management said ordinary-course claims were not expected to materially affect results.
- The company changed its fiscal year beginning in 2014 to a 52–53-week year ending on the last Sunday in December; the change results in three fewer operating days in FY 2014. The U.S. SAP system went live in Q1 2014, and management identified implementation and control-transition risks. The auditor gave an unqualified opinion on financial statements and internal controls, but the recently acquired Brazil subsidiary was excluded from the internal-control assessment.
Key facts for investors to verify
- Separate recurring operating performance from the Brazil remeasurement gain, tax valuation-allowance release, closure impairments and payroll-tax contingency; reconcile GAAP results to management’s non-GAAP measures.
- Track comparable-sales, traffic and margin trends by brand, particularly the weaker Carrabba’s and Bonefish comparable-sales results and the effect of pricing versus traffic.
- Assess debt service, variable-rate exposure, covenant headroom, lease obligations and the funding needed for planned capital spending and partner compensation obligations.
- Monitor the final IRS determination and payment timing, the South Korean tax appeal, and developments in the wage-and-hour lawsuits.
- Evaluate the acquired Brazilian business’s post-acquisition performance, foreign-exchange exposure, remaining minority-interest options and future international expansion returns.
- Confirm the execution and economics of the 22 planned closures, 2014 openings, remodel program and SAP implementation.