Brinker International, Inc. — Form 10-Q Summary
Business context and period: Brinker operates and franchises Chili’s Grill & Bar and Maggiano’s Little Italy. This report covers the 13 weeks ended September 28, 2016 (fiscal 2017 first quarter), compared with the 13 weeks ended September 23, 2015. Brinker had 1,652 restaurants at quarter-end.
Key financial results
| Metric | Q1 FY2017 | Prior year | Change |
|---|---|---|---|
| Total revenue | $758.5 million | $762.6 million | Down 0.5% |
| Operating income | $41.5 million | $56.2 million | Down 26% |
| Net income | $23.2 million | $33.2 million | Down 30% |
| Diluted EPS | $0.42 | $0.54 | Down $0.12 |
| Operating margin | 5.5% | 7.4% | Down 1.9 percentage points |
| Net cash from operations | $66.2 million | $45.9 million | Up $20.3 million |
| Capital expenditures | $27.1 million | $23.7 million | Up $3.4 million |
Cost of sales improved to 26.1% of company sales from 26.6%; restaurant labor rose to 34.0% from 33.3%, and restaurant expenses rose to 26.6% from 25.5%. The effective tax rate was 29.5%, versus 31.9%. Quarterly dividends increased from $0.32 to $0.34 per share.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $34.2 million at September 28, versus $31.4 million at June 29, 2016. Current assets were $174.5 million and current liabilities were $425.6 million.
- Long-term debt, net of issuance costs and current installments, was $1.446 billion, up from $1.111 billion at fiscal year-end. The quarter included a $350 million 5.0% senior-note issue due October 2024.
- The revolving credit facility was increased from $750 million to $1 billion; $482.8 million was available at quarter-end. Brinker reported compliance with debt covenants.
- Brinker spent approximately $350 million repurchasing 5.6 million shares, including a $300 million accelerated share repurchase. Approximately $135.8 million remained authorized. Shareholders’ deficit widened to $551.1 million from $213.1 million.
- Operating cash flow was higher than in the prior-year quarter, which was affected by settlement of liabilities assumed in the Pepper Dining acquisition. Management also cited lower performance-based compensation payouts, partly offset by lower earnings.
Performance changes and management commentary
- Company sales declined 0.4%; comparable sales for company-owned restaurants fell 1.3%, with traffic down 3.9%, partly offset by pricing, mix, and 0.7% capacity growth. System-wide comparable sales declined 1.1%.
- Chili’s comparable sales fell 1.4%; Maggiano’s fell 0.6%. Maggiano’s company sales rose 1.5%, mainly from added capacity; Chili’s company sales fell 0.7%.
- Management cited intense competition and discounting, constrained discretionary spending, wage pressure, and higher health-care costs. It described technology, menu and value initiatives as part of its effort to improve guest experience and sales. Plenti and expanded online ordering were planned for fiscal Q2.
- Fiscal 2017 projected openings were 8–9 company-owned and 40–48 franchise restaurants. No earnings or revenue guidance was provided in the filing text.
- Management said operating cash flows and available credit were adequate to fund operations and current debt obligations for the foreseeable future, and stated an intention to target a 40% dividend payout ratio.
Risks, contingencies, and unusual items
- Other gains and charges were $6.1 million, including $2.5 million of restaurant closure and lease-termination charges and $2.5 million of information-technology restructuring fees and severance. Prior-year charges were $1.7 million and included a property-sale gain.
- Credit ratings were downgraded by Fitch and S&P to BB+ and by Moody’s to Ba1, all non-investment grade with stable outlooks. Higher borrowing costs and access to credit are relevant risks.
- Maximum potential exposure under lease guarantees was $79.9 million; no material liability was recorded. Undrawn standby letters of credit totaled $28.1 million. Management did not expect pending or threatened litigation to have a material adverse effect.
- Key disclosed risks include weak traffic and consumer spending, competition, food and labor cost inflation, food safety, credit-market conditions, technology and data-security exposure, and litigation. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-sales and traffic trends improve, particularly at Chili’s, and whether planned digital and value initiatives deliver results.
- Debt levels, interest expense, covenant headroom, and the implications of the non-investment-grade ratings after substantial share repurchases.
- Final share count and settlement economics of the $300 million accelerated repurchase agreement, due no later than March 31, 2017.
- Whether restaurant labor and operating-expense increases continue to pressure margins, and whether closure and restructuring charges recur.
- Actual restaurant openings versus the fiscal 2017 plan, and the eventual financial impact of new accounting standards, including lease accounting.