Bloomin’ Brands, Inc. — Q1 2017 Form 10-Q
Reporting period: Thirteen weeks ended March 26, 2017; comparisons are with the thirteen weeks ended March 27, 2016. The company operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar. At quarter-end it owned and operated 1,242 restaurants and franchised 244.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $1,143.8 million | $1,164.2 million |
| Income from operations | $69.1 million | $86.7 million |
| Operating margin | 6.0% | 7.4% |
| Net income attributable to Bloomin’ Brands | $43.9 million | $34.5 million |
| Diluted EPS | $0.41 | $0.29 |
| Operating cash flow | $136.2 million | $130.7 million |
Revenue fell 1.7%. Restaurant sales declined to $1,135.5 million; franchise and other revenue rose to $8.3 million. Restaurant-level operating margin was 17.5% versus 17.8% on a GAAP basis; adjusted margin was 17.0% versus 17.6%. Cost of sales improved to 32.1% of restaurant sales from 32.4%, while labor costs increased to 28.6% from 27.9%.
Net income and EPS increased despite lower operating income, in part because the prior-year quarter included a $26.6 million debt defeasance, extinguishment and modification loss. Q1 2017 included $19.1 million of impairment and restaurant-closing charges, versus $3.2 million a year earlier. Adjusted diluted EPS, a non-GAAP measure, was $0.54 versus $0.47.
Cash, debt and liquidity
- Cash and cash equivalents were $98.4 million at March 26, 2017, down from $127.2 million at December 25, 2016; $29.0 million was held by foreign affiliates.
- Cash flow from operations was $136.2 million; investing used $12.4 million and financing used $154.4 million. Capital expenditures were $58.2 million.
- Total debt, net of discounts and issuance costs, was approximately $1,002.4 million, including $48.8 million current debt. The company reported $220.2 million of unused revolver capacity, net of letters of credit.
- Working capital was negative $505.5 million, including $284.1 million of unearned gift-card revenue. Management said negative working capital is common in its business and that cash receipts generally precede payment of current liabilities.
- The company was in compliance with debt covenants and believed liquidity was adequate for at least 12 months. Its senior secured credit facility matures in May 2019; the company said it was evaluating options for that maturity. It repaid the remaining PRP Mortgage Loan balance in April 2017.
Changes, outlook and other notable items
- Lower revenue primarily reflected the 2016 sale of Outback Steakhouse South Korea and restaurant closures, partly offset by new openings and favorable currency translation. Combined U.S. comparable sales fell 0.2%; Brazil comparable sales rose 3.6%. U.S. traffic declined 3.3%, while average check increased 3.1%.
- Operating income declined mainly because of costs for the 2017 Closure Initiative and weaker restaurant-level operating performance. The company decided to close 43 underperforming restaurants; most were expected to close during 2017. It estimated additional pre-tax closure and restructuring charges of $4.5–$6.5 million for the 2017 initiative and $2.3–$5.7 million for the Bonefish restructuring. Estimated future undiscounted cash expenditures for both initiatives totaled $40.5–$46.9 million, primarily lease obligations.
- In February, the company agreed to sell 54 U.S. Outback and Carrabba’s locations for $37.6 million; the sale was completed in Q2 2017, and the locations became franchises. Q1 sale-leasebacks of restaurant properties generated $46.1 million gross proceeds, with future lease costs an associated consideration.
- Management estimated 2017 capital expenditures of $260–$280 million. No specific earnings or revenue guidance was provided. The company declared a post-quarter quarterly dividend of $0.08 per share and authorized a new $250 million share-repurchase program, replacing the prior authorization.
- Reported risks include restaurant competition and consumer demand, wage and commodity inflation, food safety, foreign currency and international conditions, variable-rate debt and leverage, covenant restrictions, and the ability to fund capital needs, dividends and repurchases. Legal liabilities recorded were $5.9 million, including a $2.4 million accrual for a tentative kitchen-manager overtime class settlement. Management said ordinary-course claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether traffic, comparable sales and restaurant-level margins improve, particularly in the U.S.
- Actual costs and cash outflows from the 43-restaurant closure plan and Bonefish restructuring.
- Progress refinancing or addressing the May 2019 senior credit facility maturity, and covenant headroom under substantial leverage.
- Whether planned capital spending, share repurchases and dividends remain supportable by operating cash flow and liquidity.
- Post-quarter effects of the 54-restaurant sale, April mortgage repayment and new repurchase authorization, including resulting debt and lease obligations.