Bloomin’ Brands, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. Amounts below are in U.S. dollars. The company operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s and Roy’s. It reported 1,456 system-wide restaurants at quarter-end.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $952.9 million | $928.3 million | $2,989.4 million | $2,885.6 million |
| Operating income (loss) | ($11.5) million | $21.0 million | $127.6 million | $152.5 million |
| Net income (loss) attributable to Bloomin’ Brands | ($35.9) million | $0.6 million | $31.6 million | $69.5 million |
| Diluted earnings (loss) per share | ($0.31) | $0.01 | $0.28 | $0.65 |
| Cash from operating activities | — | $81.0 million | $106.4 million | |
| Capital expenditures | — | $134.2 million | $85.3 million |
- Q3 restaurant sales grew 2.6%; comparable sales at the four core domestic concepts rose 3.6%. Nine-month restaurant sales grew 3.5%, with core domestic comparable sales up 3.8%. Management attributed growth mainly to traffic, menu pricing, promotions, menu innovation and Outback weekend-lunch expansion.
- Q3 costs of sales were 32.8% of restaurant sales versus 32.7% a year earlier; labor was 28.6% versus 28.5%, and other restaurant operating costs were 25.1% in both periods. For the nine months, cost of sales increased to 32.5% from 32.3%, while labor improved to 28.2% from 28.7%.
- At September 30, cash and cash equivalents were $168.3 million, down from $482.1 million at December 31, 2011. Total assets were $2.899 billion and total liabilities $2.679 billion. Reported debt schedule totaled $1.579 billion, including guaranteed debt; debt was $2.110 billion at year-end 2011.
- Working capital was negative $201.9 million. This included $178.0 million of unredeemed gift-card revenue; management said negative working capital is common in its restaurant model because sales cash is generally collected before current liabilities are paid.
- Cash used in financing was $456.5 million for the nine months, largely reflecting debt repayments and refinancing, partly offset by new borrowings and IPO proceeds. Investing cash flow was positive $58.7 million, including $192.9 million of sale-leaseback proceeds.
Material changes and unusual items
- The August 2012 IPO generated approximately $142.5 million in net proceeds for the company; proceeds, together with cash on hand, were used to retire OSI’s 10% senior notes. The retirement cost $259.8 million, including premiums and accrued interest, and produced a $9.0 million extinguishment loss.
- Q3 included $40.9 million of incremental IPO-related general and administrative expense, including $18.1 million of accelerated CEO bonus expense, $16.0 million of non-cash stock compensation and higher management-agreement costs. The company also paid an $8.0 million management-agreement termination fee. These items drove much of the Q3 operating loss.
- In March, the company refinanced its property subsidiary’s prior mortgage debt with a $500 million CMBS loan. It also sold and leased back 67 restaurant properties, receiving $192.9 million and recording a deferred gain of $42.9 million. The master leases have initial 20-year terms, with renewal options.
- During October, OSI completed a further refinancing: a $1.0 billion term loan B maturing in 2019 and a $225 million revolver maturing in 2017. The term loan was fully drawn at closing; $45 million was drawn on the revolver, of which $15 million was repaid by October 31. The new facility has leverage covenants and higher stated borrowing spreads than the old term facility.
- Nine-month impairment charges were $9.1 million, primarily for underperforming locations or restaurants identified for relocation or renovation. No impairment charge was recorded in Q3; the annual goodwill and indefinite-lived intangible asset tests found no impairment.
Outlook, commentary and risks
- Management expected to open 30 or more restaurants system-wide in 2012 and planned capital expenditures of approximately $200–$220 million for the year. It identified comparable-sales growth, new domestic and international development, and margin improvement as priorities. The filing does not provide specific earnings or comparable-sales guidance.
- Management believed operating cash flow, borrowing capacity, short-term investments and restricted cash would be adequate for normal debt service, leases, capital spending and working capital over the next 12 months, subject to achieving expected revenue and cash flow and managing costs and working capital.
- Key risks include substantial leverage and restrictive covenants, variable-rate debt, commodity and labor-cost inflation, economic and consumer-spending weakness, competition, restaurant expansion and execution challenges, food safety, weather and foreign-exchange exposure. The company identified no material change in market risk from year-end and said it remained in covenant compliance at September 30.
- Other exposures include $24.5 million of guaranteed partner debt maturing in April 2013; potential lease exposure of up to $17.3 million related to a former concept; and uncertain tax positions. Management said it could not assure favorable outcomes for these contingencies.
Important facts for investors to verify
- How much of the Q3 loss reflects IPO-related and other non-recurring costs, and what ongoing G&A and stock-compensation expense will remain?
- Whether comparable-sales growth and restaurant-level margins can persist as commodity, labor, insurance and occupancy costs evolve.
- The effect of the October refinancing on interest expense, debt maturities, liquidity and compliance with leverage covenants.
- The full long-term cost and obligations arising from the 67-property sale-leaseback, including rent escalation and renewal terms.
- Whether planned 2012 openings and $200–$220 million of capital expenditures are achieved while maintaining cash flow and adequate liquidity.