Bloomin’ Brands, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2013; filed November 6, 2013. Bloomin’ Brands operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s and Roy’s. At quarter-end it reported 1,495 system-wide restaurants, including company-owned, franchised and joint-venture locations.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $967.6 million | $952.9 million | $3,078.7 million | $2,989.4 million |
| Operating income (loss) | $29.5 million | $(11.5) million | $194.3 million | $127.6 million |
| Net income (loss) attributable to Bloomin’ Brands | $11.3 million | $(35.9) million | $149.4 million | $31.6 million |
| Diluted EPS | $0.09 | $(0.31) | $1.16 | $0.28 |
| Operating margin | 3.0% | (1.2)% | 6.3% | 4.3% |
| Operating cash flow | Not separately presented for the quarter | $126.7 million | $81.0 million |
Q3 restaurant sales increased 1.5% year over year, mainly from new restaurants, while comparable sales at core domestic concepts fell 0.3%. For the first nine months, restaurant sales increased 3.0%; combined comparable sales at those concepts rose 1.2%. The filing attributes sales growth to openings, pricing, traffic and menu and service initiatives, with quarterly weakness reflecting product mix and softer comparable sales.
Q3 GAAP operating results improved substantially against 2012, largely because the prior-year quarter included $42.1 million of IPO-related expenses. Excluding identified items, adjusted operating income was $35.4 million versus $35.3 million, and adjusted diluted EPS was $0.10 versus $0.08. Nine-month net income was significantly affected by a $52.0 million income-tax benefit from releasing part of the deferred-tax valuation allowance; adjusted nine-month diluted EPS was $0.84 versus $0.79.
Margins faced cost pressure: food costs were 33.2% of restaurant sales in Q3, up 0.4 percentage points year over year, and other restaurant operating costs rose 0.6 points to 25.7%. Labor costs remained 28.6% of sales. Management cited beef and other commodity inflation, mix, supplies, utilities and repair costs, partly offset by pricing and cost-saving measures.
Financial position, cash flow and debt
- At September 30, cash and cash equivalents were $183.7 million, down from $261.7 million at year-end 2012; restricted cash was $19.3 million.
- Total debt carrying value was approximately $1.472 billion. The senior secured term loan balance was $975.0 million before unamortized discount; mortgage and mezzanine debt totaled about $486.9 million before discount. The company reported covenant compliance.
- The $225 million revolving facility had no borrowings at quarter-end; $37.6 million was committed to letters of credit, leaving approximately $187.4 million of available capacity. The term loan was repriced in April, reducing its interest-rate spread, but generated a $14.6 million debt modification/extinguishment loss.
- Nine-month operating cash flow was $126.7 million, capital expenditures were $166.2 million, and cash used in investing activities was $161.5 million. Cash declined by $78.0 million over the period.
- Working capital was negative $148.4 million, including $202.2 million of unredeemed gift-card revenue. Management said negative working capital is typical for its restaurant model and stated that expected operating cash flow, borrowing capacity and restricted cash were adequate for anticipated needs over the next 12 months.
Outlook, commentary and material items
- Management expected 45–55 system-wide openings in 2013, with a higher development pace thereafter; estimated 2013 capital expenditures of $220–$250 million. Domestic priorities included Bonefish Grill growth; international priorities included Outback development in Brazil and selected other markets.
- Management described a slowdown in comparable-sales growth amid pressure on discretionary spending and consumer confidence, and emphasized value, innovation and margin improvement. No specific full-year revenue or EPS guidance is provided in the supplied filing text.
- On November 1, 2013, after quarter-end, the company acquired an additional interest in its Brazilian joint venture, raising its ownership from 50% to 90%, for approximately $110.5 million. It financed the purchase primarily with a $100 million revolver draw and cash. The sellers retain put options and the company holds corresponding call options for remaining interests in 2015–2018. Purchase-price allocation was not yet available.
- A franchisee group exercised a put right concerning 56 California Outback restaurants. The contemplated purchase price was estimated at $100–$115 million before a $15 million renovation holdback and other adjustments; closing was subject to conditions, and the franchisees could revoke the notice. Management expected renovation costs to exceed the holdback and said the deal was expected to be EBITDA-accretive but not meaningfully affect GAAP EPS over three years.
- The IRS proposed an adjustment for employer FICA taxes on alleged unreported employee tips, with a preliminary estimated liability of $10 million. The company recorded a liability it considered appropriate; the matter remained under examination.
- The nine-month tax benefit reflected a valuation-allowance release. Management expected future effective tax rates to be higher than in 2013, though below the blended statutory rate, and warned that the release may reduce earnings in later periods relative to recognizing those benefits then.
- Principal risks include restaurant competition and consumer demand, commodity and labor-cost inflation, leverage and restrictive debt covenants, interest and foreign-exchange exposure, execution of expansion plans, food safety, and tax matters. Management reported no significant change in previously disclosed risk factors or market-risk exposure.
Most important facts for investors to verify
- Whether comparable-sales trends and restaurant-level margins improved after the Q3 slowdown, especially at Outback and Bonefish.
- How much of reported nine-month earnings came from the valuation-allowance release and other adjustments, versus recurring operating performance.
- The final purchase price, integration results and remaining option obligations for the Brazil acquisition, and the effect of the $100 million revolver borrowing on liquidity and leverage.
- Whether the T-Bird put transaction closed, its final cash cost, renovation spending and impact on debt capacity and earnings.
- The outcome and ultimate cost of the IRS tip-related FICA examination, and the company’s ability to fund planned capital spending and partner-plan obligations while servicing substantial debt.