Brinker International, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the 13 weeks ended September 27, 2017; comparison is the 13 weeks ended September 28, 2016. Brinker owns, operates, develops, and franchises Chili’s and Maggiano’s. It reported 1,682 restaurants at quarter-end.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Total revenue | $739.4 million | $758.5 million |
| Operating income | $28.6 million | $41.5 million |
| Operating margin | 3.9% | 5.5% |
| Net income | $9.9 million | $23.2 million |
| Diluted EPS | $0.20 | $0.42 |
| Operating cash flow | $50.2 million | $67.8 million |
| Capital expenditures | $22.5 million | $27.1 million |
| Cash and equivalents, quarter-end | $9.0 million | $34.2 million |
Revenue declined 2.5%, primarily from lower company restaurant comparable sales. Company restaurant expenses were 87.4% of company sales versus 86.7% a year earlier; restaurant labor rose to 35.0% from 34.0% of company sales. Cost of sales was 26.2% versus 26.1%. Interest expense increased to $13.9 million from $8.8 million.
Balance sheet and liquidity
Long-term debt, including current installments and net of debt issuance costs and discounts, was $1.363 billion at September 27, 2017, compared with $1.329 billion at June 28, 2017. The company had $425.3 million outstanding on its $1 billion revolving credit facility and $574.8 million available. Debt covenants were met. Current liabilities were $414.4 million and current assets were $140.9 million. Shareholders’ deficit was $539.0 million.
Operating cash flow decreased year over year, which management primarily attributed to lower earnings. The company drew $33.0 million net on its revolver during the quarter, primarily to fund share repurchases. It stated that operating cash flow and available credit were adequate to fund operations and current debt obligations.
Material changes and notable items
- System-wide comparable sales declined 3.5%. Company-owned comparable sales fell 3.3%; Chili’s was down 3.4% and Maggiano’s down 2.6%. Traffic declined 8.3% for company-owned restaurants.
- Management estimated Hurricanes Harvey and Irma reduced quarterly company sales by approximately $5.4 million and diluted EPS by approximately $0.03. Other gains and charges included $4.6 million of hurricane-related costs.
- The company recorded $7.2 million of impairment charges, mainly for nine underperforming Alberta Chili’s locations scheduled to close in Q2 FY2018. It also expected to negotiate lease-termination costs.
- Management identified a $1.6 million discrete tax expense from adopting share-based payment accounting rules, reducing diluted EPS by $0.03. The effective tax rate was 34.8%, versus 29.5%.
- Share repurchases were $41.7 million for approximately 1.3 million shares; $324.9 million remained available under repurchase authorizations. The quarterly dividend increased 12%, from $0.34 to $0.38 per share.
- After quarter-end, Brinker drew $60.0 million net on its revolver, repurchased about 949,000 shares for $30.0 million, sold its Mexican Chili’s joint-venture interest for $18.0 million (with a note component), and closed the nine Alberta restaurants.
Outlook, risks, and controls
The filing provides no earnings or revenue forecast. Fiscal 2018 projected openings were 50–58 restaurants overall, mostly international Chili’s franchise locations. Management cited intense casual-dining competition, discounting, weak traffic, constrained consumer discretionary spending, wage and healthcare costs, and commodity pressures. It said Chili’s menu simplification and renewed focus on burgers, ribs, and fajitas, together with digital ordering and curbside service, were intended to support guest experience and sales. International franchisees opened 10 restaurants in the quarter.
Brinker disclosed a material weakness in controls over deferred income tax liability accuracy, primarily involving property and equipment. Disclosure controls were therefore deemed ineffective as of quarter-end. The company was implementing remediation measures and performed supplemental procedures; management stated the financial statements fairly presented results. The weakness had not yet been remediated.
Lease guarantees or secondary liability totaled $63.1 million. The Romano’s Macaroni Grill operator filed for Chapter 11 after closing several locations; Brinker said the existing estimated liability of about $1.1 million remained appropriate, but further potential losses could not be estimated. The company also had $31.0 million of undrawn standby letters of credit. It reported no pending or threatened legal matter expected to have a material adverse effect.
Adoption of the lease accounting standard is expected to materially increase reported assets and liabilities; the filing cited approximately $606.9 million of remaining operating lease payments at fiscal 2017 year-end. The impact of new revenue rules on gift cards, loyalty programs, and franchise agreements was still under evaluation.
Important facts for investors to verify
- Whether comparable-sales and traffic trends improve, particularly at Chili’s, and the effect of pricing, mix, and labor costs on restaurant margins.
- Actual hurricane-related insurance recoveries and the final costs of closing the Alberta restaurants.
- Progress in remediating the deferred-tax control weakness and any resulting revisions or additional disclosures.
- Debt and interest-rate exposure, including post-quarter revolver borrowing, upcoming note maturities, and continued covenant compliance.
- Potential incremental lease-guarantee losses arising from the Romano’s Macaroni Grill bankruptcy, and the accounting outcome of the Mexican joint-venture sale.
- The effects of share repurchases and the higher dividend on liquidity and leverage, as well as the eventual balance-sheet impact of lease accounting adoption.