Bloomin’ Brands, Inc. — Q2 2018 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended July 1, 2018; comparative periods ended June 25, 2017. Amounts below are in U.S. dollars. The company operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar. At quarter-end it had 1,197 company-operated and 293 franchised restaurants.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $1,031.8M | $1,036.5M | $2,148.3M | $2,191.2M |
| Operating income | $32.9M | $41.3M | $111.3M | $118.2M |
| Net income | $26.7M | $35.8M | $92.9M | $85.5M |
| Net income attributable to Bloomin’ Brands | $26.7M | $35.1M | $92.1M | $83.8M |
| Diluted EPS | $0.28 | $0.34 | $0.97 | $0.80 |
| Operating margin | 3.2% | 4.0% | 5.2% | 5.4% |
Q2 U.S. comparable sales rose 2.4%; Brazil comparable sales fell 6.1%. U.S. restaurant-level operating margin was 14.5% versus 13.8%; International margin was 17.7% versus 21.1%. Consolidated restaurant-level margin was 15.0% versus 14.9% in Q2 and 15.8% versus 16.4% in the first half.
At July 1, cash and cash equivalents were $81.7M (plus $4.5M restricted cash), total debt net of discounts was $1.140B, and stockholders’ equity was $91.5M. Current assets of $248.1M were below current liabilities of $631.2M, resulting in negative working capital of $383.1M; management attributes this in part to $221.9M of unearned revenue, primarily gift cards, and says negative working capital is common in the restaurant sector.
First-half operating cash flow was $100.1M, versus $183.1M a year earlier; capital expenditures were $92.5M, versus $116.3M. Investing activities used $81.9M and financing activities used $58.3M. The company had $343.0M of unused revolving capacity, net of letters of credit, and reported compliance with debt covenants.
Material changes and drivers
- Q2 revenue declined 0.4%; first-half revenue declined 2.0%. Domestic refranchising, restaurant closures and foreign currency translation weighed on reported sales, partly offset by openings and stronger U.S. comparable sales.
- Q2 operating income fell $8.4M, chiefly due to international impairment and closure charges, higher labor and commodity costs, and lower Brazil sales. Cost savings, higher average checks and lower advertising expense partly offset these pressures.
- First-half net income increased despite lower operating income, helped by a substantially lower income-tax provision/benefit. The effective tax rate was negative 3.6% versus 19.7%, reflecting the Tax Act’s lower federal rate, lower forecast pretax income and equity-compensation tax benefits.
- Interest expense rose to $11.3M in Q2 and $21.6M in the first half, primarily from additional revolver borrowings, higher rates and prior-year incremental term borrowing.
- The 2017 comparison included a $7.3M gain associated with selling 54 U.S. restaurants. The company also adopted revenue-recognition guidance retrospectively; prior-period figures are restated.
Outlook, risks and unusual items
- No specific earnings or comparable-sales guidance is provided. Management estimates 2018 capital expenditures of approximately $200M and believes liquidity is adequate for at least the next 12 months, subject to achieving expected revenue and cash flow and managing costs and working capital.
- Management cited political unrest and a truckers’ strike in Brazil that disrupted restaurant operating days. It expected consumer confidence to resume improving after Brazil’s October presidential election, while noting uncertainty.
- International restructuring, including China, generated $9.2M of first-half impairment and closure charges. Additional closure-initiative expenses of $3.2M–$4.0M are expected through Q3 2019; estimated future cash expenditures are $22.3M–$27.4M, primarily lease-related, with payments extending as far as January 2029.
- Key risks include wage and commodity inflation, competition, consumer traffic and spending, foreign exchange exposure, substantial leverage and variable interest rates, food safety, cybersecurity, and potential impairment. A 10% currency-rate change would have affected first-half foreign-entity revenue by approximately $24.6M, with a nominal net-income impact; the company does not hedge currency exposure.
- Potential payments under assigned lease guarantees were estimated at $27.2M undiscounted ($18.7M present value); no liability was recorded. Recorded liabilities for legal matters were $3.5M, and management did not expect ordinary-course claims to materially affect results.
- Adoption of the new lease standard in 2019 is expected to significantly increase reported balance-sheet assets and liabilities, with likely insignificant operating-statement impact. Tax Act accounting remained provisional and could change materially.
Important facts for investors to verify
- Whether U.S. comparable-sales growth can offset traffic declines at several concepts and the continued weakness in Brazil.
- Whether labor, commodity and operating-cost inflation continues to pressure restaurant-level and consolidated margins.
- Cash conversion and working-capital movements, including the timing of gift-card receivables, inventory, payables and incentive payments.
- Debt levels, borrowing costs, revolving-facility availability, covenant compliance and the company’s plans for its May 2019 interest-rate-swap maturity.
- Actual capital spending and closure-related cash costs, and the eventual balance-sheet effect of lease-standard adoption.
- Final Tax Act accounting and any material revisions to provisional tax estimates; dividend and repurchase capacity also depends on earnings, cash flows and the board’s decisions.