Business context and reporting period
Bloomin’ Brands operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar. At December 28, 2014, it operated 1,344 restaurants and franchised 166 across the U.S. and 21 countries. The company sold Roy’s in January 2015.
This is the fiscal-year 2014 Form 10-K, covering the 52 weeks ended December 28, 2014; it also reports fourth-quarter results. Fiscal 2014 had three fewer operating days than fiscal 2013 after the company changed its year-end, reducing estimated 2014 restaurant sales by $46.0 million and net income attributable to Bloomin’ Brands by $9.2 million. Fourth-quarter revenue was estimated to be lower by $31.6 million from the calendar change, which limits period comparability.
Financial performance and liquidity
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Total revenue | $4,442.7 million | $4,129.2 million |
| Income from operations | $192.0 million; 4.3% margin | $225.4 million; 5.5% margin |
| Net income attributable to Bloomin’ Brands | $91.1 million | $208.4 million |
| Diluted EPS | $0.71 | $1.63 |
| Cash from operating activities | $352.0 million | $377.3 million |
| Capital expenditures | $237.9 million | $237.2 million |
Revenue increased 7.6%, primarily from consolidating the Brazil restaurants acquired in November 2013 and sales at newer restaurants. System-wide sales rose 2.4%; blended domestic comparable restaurant sales increased 2.0%. Cost of sales was 32.5% of restaurant sales (down 0.1 percentage point), and labor was 27.6% (down 0.7 point); other restaurant operating costs rose to 23.8% from 23.6%.
Reported earnings included $52.1 million of impairment and restaurant-closing charges, including charges related to planned closures, Roy’s and corporate aircraft, and $9.0 million of severance. Fiscal 2013 earnings included a $36.6 million Brazil remeasurement gain and a $52.0 million income-tax benefit from releasing a U.S. valuation allowance. The company reported adjusted diluted EPS of $1.10 in 2014 versus $1.11 in 2013; this is a company-defined non-GAAP measure.
Cash and cash equivalents were $165.7 million, including $89.7 million held by foreign affiliates. Total debt, net, was $1,315.8 million, down from $1,419.1 million. The company reported $245.4 million of available revolving capacity, net of letters of credit, and said it was in compliance with debt covenants. Working capital was negative $239.6 million, including $376.7 million of unearned gift-card revenue; management said negative working capital is typical for its business. Operating cash flow less capital expenditures was approximately $114.1 million.
Material changes, outlook and risks
- Operating income fell by $33.4 million year over year. Management cited closure and impairment charges, lower South Korea unit volumes, higher general and administrative costs, and higher depreciation, partly offset by improved restaurant-level margins.
- The company decided to close 36 underperforming international restaurants, primarily in South Korea, and expected substantial completion in the first quarter of 2015. It expected another $9–$12 million of pre-tax closure charges and $18–$23 million of cash expenditures through November 2022. South Korea’s market weakness, competition and household debt were cited as pressures.
- For 2015, management planned 40–50 system-wide openings, with at least half international, and identified Bonefish Grill as its top domestic development priority and Brazil as its leading international growth priority. Planned capital expenditures were $235–$255 million. Management expected commodity-cost increases of 4%–6%, primarily from beef.
- The board adopted a quarterly dividend policy and authorized up to $100 million in share repurchases; the first $0.06-per-share dividend was declared in February 2015. Debt covenants and subsidiary dividend restrictions may limit these capital returns.
- Risks include substantial leverage and variable interest rates, commodity and labor inflation, reliance on a concentrated beef supply chain, foreign currency and economic exposure, competition, food safety, information-security incidents, regulation and seasonality. A $400 million interest-rate swap was scheduled to begin June 30, 2015; management estimated $3.0 million of additional interest expense in the second half of 2015 from the swap.
- Contingencies include a South Korea tax assessment of $7.9 million, which the company appealed after depositing the assessment; an unresolved wage-and-hour collective action; and a Roy’s sale provision that could require payment of up to $5.0 million if specified lease contingencies are not resolved. The filing says the company could not estimate a reasonably possible loss range for the wage action.
Management stated that expected liquidity was adequate for the next 12 months, subject to achieving anticipated revenue and cash flow and managing costs and working capital. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Separate underlying operating trends from the shorter 2014 reporting period and the significant one-time charges and 2013 tax and Brazil-related gains.
- Track whether the South Korea closures improve profitability and whether the remaining closure costs and long-dated lease obligations stay within management’s estimates.
- Assess debt repayment capacity, covenant headroom, variable-rate exposure and the April 2017 CMBS maturity alongside planned capital spending, dividends and repurchases.
- Monitor the forecast 4%–6% commodity-cost increase, especially beef, and the company’s ability to offset it through pricing, sourcing and productivity without weakening traffic.
- Follow the South Korea tax appeal, wage-and-hour litigation and Roy’s lease-contingency obligations; the filing does not provide a clear loss estimate for the wage action.