Business context and reporting period
Brinker International, Inc. operates and franchises Chili’s, Maggiano’s and virtual brands. This Form 10-Q covers the 13 and 26 weeks ended December 28, 2022, the second quarter and first half of fiscal 2023. At period-end, the company had 1,648 restaurants: 1,182 company-operated and 466 franchised.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | 13 weeks ended Dec. 28, 2022 | Prior-year quarter | 26 weeks ended Dec. 28, 2022 | Prior-year first half |
|---|---|---|---|---|
| Total revenue | $1,019.0 | $925.8 | $1,974.5 | $1,802.2 |
| Operating income | $40.7 | $39.8 | $20.9 | $65.4 |
| Net income (loss) | $27.9 | $27.6 | $(2.3) | $40.8 |
| Diluted EPS | $0.62 | $0.60 | $(0.05) | $0.88 |
| Operating margin, approximate | 4.0% | 4.3% | 1.1% | 3.6% |
- Quarterly comparable sales rose 9.1% system-wide: 8.0% at Chili’s and 21.2% at Maggiano’s. First-half system-wide comparable sales increased 7.3%. Chili’s comparable-sales growth was price- and mix-driven despite lower traffic; Maggiano’s recorded positive traffic impact.
- First-half food and beverage costs were 29.6% of company sales, up 2.3 percentage points year over year, reflecting commodity inflation partly offset by menu pricing and favorable mix. Restaurant labor improved 0.8 points as a share of company sales, while restaurant expenses worsened 1.2 points.
- First-half operating cash flow was $68.0, down from $107.4. Capital expenditures were $95.3, implying cash flow after capital expenditures of approximately $(27.3), compared with approximately $33.3 in the prior-year period.
- Cash was $14.7 at December 28, 2022. Long-term debt and finance leases totaled $1,040.2 before unamortized costs and current installments; $311.3 was drawn on the revolver, with $488.7 of availability. Current assets of $237.2 were below current liabilities of $573.5.
Material changes versus the prior comparable period
- Revenue increased 10.1% in the quarter and 9.6% in the first half. Growth reflected comparable sales, fiscal 2022 Chili’s restaurant acquisitions, openings and, at Maggiano’s, banquet revenue.
- Quarterly operating income was slightly higher, but operating margin declined. For the first half, operating income and net income fell substantially year over year; higher food, labor and restaurant costs and interest expense weighed on results.
- Interest expense rose to $26.2 for the first half from $23.7, primarily reflecting higher rates on revolving-credit borrowings. Net revolver borrowings increased $40.0 during the period.
- First-half investing cash use was $93.2 versus $158.1 in the prior year, which included cash paid for acquired Chili’s restaurants. Current-period capital expenditures increased, primarily for new restaurant construction.
Outlook, risks and unusual items
- Management projected 14 company-owned and 17–21 franchised restaurant openings for fiscal 2023, or 31–35 total. It stated that operating cash flow and revolver availability should be adequate for operations and debt obligations over the next year.
- The $300.0 of 3.875% notes mature in May 2023. The company classified them as long-term based on its stated intent and ability to refinance through the revolver. It reported compliance with debt covenants and expected continued compliance during the remainder of fiscal 2023.
- Inflation in food, wages and other operating costs, staffing challenges, supply-chain disruptions, weaker consumer spending, COVID-19 impacts and geopolitical events were identified as risks. A one-percentage-point increase in variable interest rates would increase estimated annual interest expense by $3.1.
- Other gains and charges were $13.5 for the first half, including restaurant closures, severance, enterprise-system implementation, natural-disaster losses and remodel-related costs. The quarter also included Hurricane Ian and December winter-storm costs.
- Lease guarantees and secondary liabilities were estimated at $22.8; the company accrued $1.1 for estimated exposure to lease defaults. A cybersecurity class action seeks damages in excess of $5.0, but the company said any loss or range of loss was not determinable and recorded no liability. Management did not expect pending or threatened legal matters to have a material adverse effect.
- The company repurchased no shares under its public repurchase program during the first half; $204.0 of authorization remained. It retired 10.0 million treasury shares during the first quarter.
Important facts for investors to verify
- Whether menu pricing can continue to offset food-cost inflation without further pressure on traffic, particularly at Chili’s.
- Progress on first-half operating performance and cash generation, including the effect of capital spending on liquidity.
- Refinancing of the May 2023 notes, future revolver utilization, borrowing costs and covenant headroom.
- Fiscal 2023 restaurant opening expectations and comparable-sales trends by brand.
- Developments in lease-default exposures and the pending cybersecurity litigation.