Bloomin’ Brands, Inc. — Q2 2016 Form 10-Q
Reporting period: Unaudited quarter of 13 weeks and first half of 26 weeks ended June 26, 2016; comparisons are to the periods ended June 28, 2015. Bloomin’ Brands operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s, with U.S. and International reporting segments.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Total revenue | $1,078.6 million | $1,099.6 million | $2,242.8 million | $2,301.7 million |
| Operating income | $13.3 million | $62.6 million | $100.0 million | $160.3 million |
| Net income attributable to Bloomin’ Brands | $(9.2) million | $32.2 million | $25.3 million | $92.8 million |
| Diluted EPS | $(0.08) | $0.26 | $0.21 | $0.73 |
| Operating margin | 1.2% | 5.7% | 4.5% | 7.0% |
- Q2 U.S. comparable sales fell 2.3%; U.S. traffic declined 5.2%, partly offset by a 2.9% increase in average check. First-half U.S. comparable sales fell 1.9%.
- Q2 restaurant-level operating margin in the U.S. was 15.5%, down from 15.9%; International was 16.2%, down from 16.8%.
- First-half operating cash flow was $205.4 million, versus $197.4 million. Investing provided $70.1 million, compared with $89.3 million used in the prior-year period; financing used $284.5 million, versus $139.1 million.
- Cash and cash equivalents were $102.1 million at quarter-end, down from $132.3 million at December 27, 2015. Working capital was negative $428.7 million, including $264.9 million of unearned revenue, principally gift cards.
- Long-term debt, net, was $1.210 billion, plus $28.3 million current portion. The company reported $182.7 million of unused revolving capacity, net of letters of credit. It was in compliance with debt covenants at quarter-end.
- First-half capital expenditures were $109.3 million. Management estimated full-year 2016 capital expenditures of $235–255 million.
Changes, outlook and notable items
- Q2 revenue declined 1.9%, primarily from lower U.S. comparable sales, Brazil currency translation and restaurant closures; new openings partly offset the decline. Operating income fell sharply, reflecting a $39.6 million impairment associated with the South Korea sale and weaker restaurant-level margins.
- Labor costs rose as a share of restaurant sales, mainly from higher wage rates and service-model investment. Food-cost savings and menu pricing helped offset commodity and mix pressures.
- In July 2016, the company completed the sale of Outback South Korea for $50 million cash; the locations became franchised. The related impairment and tax effects contributed to a 366.2% Q2 effective tax rate. The quarter’s GAAP loss should be distinguished from adjusted diluted EPS of $0.30, a company-defined non-GAAP measure.
- First-half results included a $26.6 million loss on defeasance of the 2012 CMBS debt. The refinancing replaced that debt with a PRP mortgage loan and increased revolving-credit borrowings.
- After quarter-end, the PRP loan was amended to add $69.5 million of borrowing, raising its balance to approximately $258.8 million. Management intended to use sale-leaseback proceeds to fund repayment; specified loan balance thresholds can require rental income to be applied to principal.
- The company sold 46 restaurant properties in sale-leaseback transactions for $163.5 million gross proceeds, creating deferred gains and higher future rent expense. Management said expected liquidity sources were adequate for the next 12 months, subject to revenue, cash flow, cost and working-capital performance.
- Management decided to close 14 Bonefish restaurants, with closures expected to be substantially complete by Q1 2019. Estimated future cash expenditures are $11.1–13.3 million through October 2024.
- The board authorized a new $300 million share repurchase program in July 2016 after canceling the remaining authorization under the prior program. The filing also identifies consumer demand, competition, food safety, labor and commodity costs, foreign exchange, leverage, interest rates and ability to fund dividends and repurchases as risks.
- A proposed $3.2 million settlement in an employee wage-and-hour case had conditional court approval; final approval remained pending. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether comparable-sales and traffic trends improve, particularly in the U.S., and whether cost initiatives can offset wage, commodity and occupancy pressures.
- The cash-flow sustainability behind dividends and repurchases, given negative working capital, leverage and planned capital spending.
- PRP loan repayment terms, refinancing or sale-leaseback execution, and the effect of property sales on future rent and liquidity.
- The final proceeds, franchise economics and any remaining tax or accounting effects of the South Korea disposition.
- Actual closure costs and timing for Bonefish, and final approval and cost of the wage-and-hour settlement.