Brinker International Reports Second Quarter Results

DALLAS, Jan. 25, 2017 (hospitalitybusinessnews.com) — Brinker International, Inc. today announced results for the fiscal second quarter ended Dec. 28, 2016 and updated its fiscal 2017 outlook.

Highlights include the following:

  • On a GAAP basis, earnings per diluted share in the second quarter of fiscal 2017 decreased 13.8 percent to $0.69 compared to $0.80 for the second quarter of fiscal 2016
  • Earnings per diluted share, excluding special items, in the second quarter of fiscal 2017 decreased 9.0 percent to $0.71 compared to $0.78 for the second quarter of fiscal 2016 (see non-GAAP reconciliation below)
  • Brinker’s total revenues in the second quarter of fiscal 2017 decreased 2.2 percent to $771.0 million compared to the second quarter of fiscal 2016 and company sales in the second quarter of fiscal 2017 decreased 2.2 percent to $748.7 million compared to the second quarter of fiscal 2016
  • Chili’s company-owned comparable restaurant sales in the second quarter of fiscal 2017 decreased 3.3 percent
  • Maggiano’s comparable restaurant sales in the second quarter of fiscal 2017 decreased 0.8 percent
  • Chili’s franchise comparable restaurant sales in the second quarter of fiscal 2017 decreased 3.5 percent, which includes a 3.0 percent and 4.2 percent decrease for U.S. and international franchise restaurants, respectively
  • Operating income, as a percent of total revenues, declined approximately 160 basis points to 8.0 percent in the second quarter of fiscal 2017 compared to 9.6 percent for the second quarter of fiscal 2016
  • Restaurant operating margin, as a percent of company sales, declined approximately 100 basis points to 15.1 percent in the second quarter of fiscal 2017 compared to 16.1 percent for the second quarter of fiscal 2016 (see non-GAAP reconciliation below)
  • For the first six months of fiscal 2017, cash flows provided by operating activities were $141.1 million and capital expenditures totaled $60.1 million. Free cash flow was $81.0 million (see non-GAAP reconciliation below)
  • The company is updating its fiscal 2017 outlook and now estimates earnings per diluted share, excluding special items, to be in the range of $3.05 to $3.15 for fiscal 2017

“We are not satisfied with our second quarter results.  While we believe our initiatives can deliver share gains, our overall performance was hurt by a much weaker-than-expected casual dining category,” said Wyman Roberts, chief executive officer and president. “We are taking actions to sharpen our focus on more impactful innovation and execution designed to create long-term value for our shareholders.”

Table 1: Q2 comparable restaurant sales1

Company-owned, reported brands and franchise; percentage

Q2 17

Q2 16

Brinker International

(2.9)

(2.6)

  Chili’s Company-Owned

     Comparable Restaurant Sales

(3.3)

(2.8)

     Pricing Impact

1.8

0.8

     Mix-Shift2

1.4

0.4

     Traffic

(6.5)

(4.0)

  Maggiano’s

     Comparable Restaurant Sales

(0.8)

(1.8)

     Pricing Impact

2.6

2.3

     Mix-Shift2

(0.9)

(1.2)

     Traffic

(2.5)

(2.9)

Chili’s Franchise3

(3.5)

0.9

  U.S. Comparable Restaurant Sales

(3.0)

(0.1)

  International Comparable Restaurant Sales

(4.2)

2.6

Chili’s Domestic4

(3.2)

(2.1)

System-wide5

(3.1)

(1.6)

1

Comparable restaurant sales includes all restaurants that have been in operation for more than 18 months.

2

Mix shift is calculated as the year over year percentage change in company sales resulting from the change in menu items ordered by guests.

3

Revenues generated by franchisees are not included in revenues on the consolidated statements of comprehensive income; however, we generate royalty revenue and advertising fees based on franchisee revenues, where applicable. We believe including franchise comparable restaurant sales provides investors information regarding brand performance that is relevant to current operations and may impact future restaurant development.

4

Chili’s Domestic comparable restaurant sales percentages are derived from sales generated by company-owned and franchise operated Chili’s restaurants in the United States.

5

System-wide comparable restaurant sales are derived from sales generated by company-owned Chili’s and Maggiano’s restaurants in addition to the sales generated at franchise operated Chili’s restaurants.

Quarterly Operating Performance
CHILI’S second quarter company sales decreased 2.9 percent to $632.1 million from $651.0 million in the prior year primarily due to a decline in comparable restaurant sales. As compared to the prior year, Chili’s restaurant operating margin1 declined. Restaurant labor, as a percent of company sales, increased compared to the prior year due to higher wage rates and employee health insurance expenses. Restaurant expenses, as a percent of company sales, increased due to deleverage, higher advertising and repairs and maintenance expenses. Cost of sales, as a percent of company sales, decreased due to increased menu pricing and  favorable commodity pricing primarily related to poultry, burgers and prime rib, partially offset by unfavorable menu item mix and commodity pricing primarily related to avocados.

MAGGIANO’S second quarter company sales increased 1.7 percent to $116.6 million from $114.7 million in the prior year primarily due to an increase in restaurant capacity, partially offset by a decline in comparable restaurant sales. As compared to the prior year, Maggiano’s restaurant operating margin1 improved. Cost of sales, as a percent of company sales, was positively impacted by  favorable commodity pricing and increased menu pricing, partially offset by unfavorable menu item mix. Restaurant expenses, as a percent of company sales, decreased due to lower preopening expenses, partially offset by higher supervision expenses. Restaurant labor, as a percent of company sales, increased due to higher manager bonuses and increased employee health insurance expenses.

1Restaurant operating margin is defined as Company sales less Cost of sales, Restaurant labor and Restaurant expenses and excludes Depreciation and amortization expenses. (See non-GAAP reconciliation below)

FRANCHISE AND OTHER revenues decreased 2.6 percent to $22.3 million for the second quarter compared to $22.9 million in the prior year. Brinker franchisees generated approximately $320 million in sales2 for the second quarter of fiscal 2017.

2Royalty revenues are recognized based on the sales generated and reported to the company by franchisees.

Other
Depreciation and amortization expense increased $0.2 million for the quarter compared to the second quarter of fiscal 2016 primarily due to depreciation on asset replacements and new restaurant openings, partially offset by an increase in fully depreciated assets and restaurant closures.

General and administrative expense increased $1.6 million for the quarter compared to the second quarter of fiscal 2016 primarily due to higher stock compensation and payroll expenses, partially offset by lower performance-based compensation.

On a GAAP basis, the effective income tax rate decreased to 28.2 percent in the current quarter from 30.1 percent in the second quarter of fiscal 2016. Excluding the impact of special items, the effective income tax rate decreased to 28.1 percent in the current quarter compared to 31.3 percent in the second quarter of fiscal 2016.  The effective income tax rates decreased in the current quarter primarily due to lower profits and the impact of tax credits.

 

Table 2: Reconciliation of net income excluding special items

Q2 17 and Q2 16; $ millions and $ per diluted share after-tax

Brinker believes excluding special items from its financial results provides investors with a clearer perspective of the company’s ongoing operating performance and a more relevant comparison to prior period results.

Q2 17

EPS Q2 17

Q2 16

EPS Q2 16

Net Income

34.6

0.69

47.7

0.80

Special items1

1.3

0.03

(0.1)

0.00

Income tax effect related to special items

(0.3)

(0.01)

0.1

0.00

Adjustment for tax items2

(0.8)

(0.02)

Special items, net of taxes

1.0

0.02

(0.8)

(0.02)

Net Income excluding special items

35.6

0.71

46.9

0.78

1

See footnote “b” to the consolidated statements of comprehensive income for additional details on the composition of these amounts.

2

Discrete tax items result from the resolution of certain tax positions which directly impacts tax expense.

Table 3: Calculation of restaurant operating margin and reconciliation to operating income

Q2 17 and Q2 16; $ millions

Brinker believes presenting restaurant operating margin provides a useful metric by which to evaluate restaurant-level operating efficiency and performance.

Q2F17

Q2F16

Company sales

748.7

765.7

Cost of sales

193.5

203.8

Restaurant labor

248.7

247.6

Restaurant expenses

193.1

190.7

Restaurant operating margin

113.4

123.6

Divided by company sales

748.7

765.7

Restaurant operating margin as a percent of company sales

15.1

%

16.1

%

Restaurant operating margin

113.4

123.6

Franchise and other revenues

22.3

22.9

Depreciation and amortization

(39.3)

(39.1)

General and administrative

(33.5)

(31.9)

Other gains and charges

(1.3)

0.1

Operating income

61.6

75.6

Divided by total revenues

771.0

788.6

Operating income as a percent of total revenues

8.0

%

9.6

%

Table 4: Reconciliation of free cash flow

Q2 17; $ millions

Brinker believes presenting free cash flow provides a useful measure to evaluate the cash flow available for reinvestment after considering the capital requirements of our business operations.

Twenty-six Week
Period Ended
Dec. 28, 2016

Cash flows provided by operating activities

141.1

Capital expenditures

(60.1)

Free cash flow

81.0

Fiscal 2017 Outlook Update
“While we believe our initiatives are gaining traction and plan to enhance our focus to improve performance, we are reducing our full-year adjusted EPS guidance primarily to reflect lower category sales than originally planned,”  said Tom Edwards, executive vice president and chief financial officer.

The company is updating guidance for fiscal 2017 due to changes in our performance expectations and recent reorganization activities. We continually examine our business model to identify efficiencies and react to changes in the business environment. We have reorganized Chili’s restaurant operations team and certain positions at the Restaurant Support Center to streamline our staffing to align with our current management strategy. We estimate that this action will result in severance and other separation related charges of approximately $6.0 million. These amounts will be recorded in the third quarter of fiscal 2017 in the Other gains and charges caption of our consolidated statements of comprehensive income.  We anticipate that this reorganization will result in pre-tax savings of over $5 million in fiscal 2017 and approximately $12 million on an annualized basis.

We are unable to reliably forecast special items such as restaurant impairments, restaurant closures, reorganization charges and legal settlements without unreasonable effort. As such we do not present a reconciliation of forecasted adjusted earnings per diluted share, excluding special items, to US GAAP earnings per diluted share.

The company estimates that earnings per diluted share, excluding special items, will be in the range of $3.05 to $3.15. Our updated earnings expectations are based on the following assumptions:

  • Total revenues are now estimated to decrease approximately 2.0 to 2.5 percent on a GAAP basis and decrease approximately 1.0 to 1.5 percent excluding the impact of the 53rd week in fiscal 2016
  • Comparable restaurant sales are now estimated to be down 1.5 to 2.0 percent
  • Restaurant operating margin is now estimated to be down approximately 90 basis points year-over-year on a 52 week basis
  • General and administrative expense is now estimated to be an increase of approximately $6.0 to $8.0 million
  • Depreciation is now estimated to be flat to an increase of approximately $1.0 million
  • Free cash flow is estimated to be $205 to $215 million

The company believes providing fiscal 2017 earnings per diluted share, excluding special items, guidance provides investors the appropriate insight into the company’s ongoing operating performance.

BRINKER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share amounts)

(Unaudited)

Thirteen Week Periods Ended

Twenty-Six Week Periods Ended

Dec. 28, 2016

Dec. 23, 2015

Dec. 28, 2016

Dec. 23, 2015

Revenues:

Company sales

$

748,709

$

765,672

$

1,486,119

$

1,506,153

Franchise and other revenues (a)

22,334

22,938

43,416

45,016

Total revenues

771,043

788,610

1,529,535

1,551,169

Operating costs and expenses:

Company restaurants (excluding depreciation and amortization)

Cost of sales

193,537

203,799

385,839

400,402

Restaurant labor

248,692

247,596

499,262

494,173

Restaurant expenses

193,131

190,660

389,774

379,833

Company restaurant expenses

635,360

642,055

1,274,875

1,274,408

Depreciation and amortization

39,305

39,114

78,191

78,285

General and administrative

33,546

31,909

66,083

65,020

Other gains and charges (b)

1,306

(87)

7,384

1,590

Total operating costs and expenses

709,517

712,991

1,426,533

1,419,303

Operating income

61,526

75,619

103,002

131,866

Interest expense

13,641

7,907

22,450

15,674

Other, net

(383)

(560)

(682)

(833)

Income before provision for income taxes

48,268

68,272

81,234

117,025

Provision for income taxes

13,631

20,578

23,364

36,124

Net income

$

34,637

$

47,694

$

57,870

$

80,901

Basic net income per share

$

0.70

$

0.81

$

1.11

$

1.35

Diluted net income per share

$

0.69

$

0.80

$

1.09

$

1.34

Basic weighted average shares outstanding

49,833

59,198

52,339

59,712

Diluted weighted average shares outstanding

50,480

59,899

53,028

60,553

Other comprehensive loss:

Foreign currency translation adjustment (c)

$

(1,664)

$

(460)

$

(2,145)

$

(3,265)

Other comprehensive loss

(1,664)

(460)

(2,145)

(3,265)

Comprehensive income

$

32,973

$

47,234

$

55,725

$

77,636

(a)

Franchise and other revenues primarily includes royalties, development fees, franchise fees, Maggiano’s banquet service charge income, gift card breakage and discounts, tabletop gaming revenue, Chili’s retail food product royalties and delivery fee income.

(b)

Other gains and charges include:

Thirteen Week Periods Ended

Twenty-Six Week Periods Ended

Dec. 28, 2016

Dec. 23, 2015

Dec. 28, 2016

Dec. 23, 2015

Gain on the sale of assets, net

$

(2,569)

$

$

(2,569)

$

(1,762)

Restaurant impairment charges

1,851

468

1,851

525

Restaurant closure charges

321

2,827

Information technology restructuring

209

2,700

Severance

209

293

2,368

Litigation

(2,032)

(2,032)

Acquisition costs

580

Other

1,494

1,268

2,282

1,911

$

1,306

$

(87)

$

7,384

$

1,590

(c)

The foreign currency translation adjustment included in comprehensive income on the consolidated statements of comprehensive income represents the unrealized impact of translating the financial statements of the Canadian restaurants and the Mexican joint venture from their respective functional currencies to U.S. dollars. This amount is not included in net income and would only be realized upon disposition of the businesses.

BRINKER INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

Dec. 28, 2016

June 29, 2016

ASSETS

Current assets

$

224,268

$

176,774

Net property and equipment (a)

1,018,221

1,043,152

Total other assets

255,616

249,534

Total assets

$

1,498,105

$

1,469,460

LIABILITIES AND SHAREHOLDERS’ DEFICIT

Current installments of long-term debt

$

3,815

$

3,563

Other current liabilities

465,989

428,880

Long-term debt, less current installments

1,416,212

1,110,693

Other liabilities

142,675

139,423

Total shareholders’ deficit

(530,586)

(213,099)

Total liabilities and shareholders’ deficit

$

1,498,105

$

1,469,460

(a)

At Dec. 28, 2016, the company owned the land and buildings for 190 of the 1,001 company-owned restaurants. The net book values of the land totaled $143.2 million and the buildings totaled $101.0 million associated with these restaurants.

BRINKER INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Twenty-Six Week Periods Ended

Dec. 28, 2016

Dec. 23, 2015

Cash Flows From Operating Activities:

Net income

$

57,870

$

80,901

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

78,191

78,285

Stock-based compensation

8,152

7,522

Restructure charges and other impairments

8,000

1,229

Net gain on disposal of assets

(811)

(274)

Changes in assets and liabilities

(10,266)

(11,424)

Net cash provided by operating activities

141,136

156,239

Cash Flows from Investing Activities:

Payments for property and equipment

(60,055)

(52,199)

Proceeds from sale of assets

3,022

2,756

Payment for business acquisition, net of cash acquired

(105,577)

Net cash used in investing activities

(57,033)

(155,020)

Cash Flows from Financing Activities:

Proceeds from issuances of long-term debt

350,000

Purchases of treasury stock

(349,994)

(140,089)

Payments on revolving credit facility

(138,000)

(20,000)

Borrowings on revolving credit facility

100,000

207,500

Payments of dividends

(36,944)

(37,363)

Payments for debt issuance costs

(10,216)

Proceeds from issuances of treasury stock

3,837

1,691

Payments on long-term debt

(1,862)

(1,698)

Excess tax benefits from stock-based compensation

1,688

4,907

Net cash (used in) provided by financing activities

(81,491)

14,948

Net change in cash and cash equivalents

2,612

16,167

Cash and cash equivalents at beginning of period

31,446

55,121

Cash and cash equivalents at end of period

$

34,058

$

71,288

BRINKER INTERNATIONAL, INC.

RESTAURANT SUMMARY

Second Quarter

Openings

Fiscal 2017

Total Restaurants

Dec. 28, 2016

Projected Openings
Fiscal 2017

Company-owned restaurants:

Chili’s domestic

1

935

5-6

Chili’s international

1

14

1

Maggiano’s

1

52

2

Total company-owned

3

1,001

8-9

Franchise restaurants:

Chili’s domestic

1

316

5-8

Chili’s international

8

341

35-40

Total franchise

9

657

40-48

Total restaurants:

Chili’s domestic

2

1,251

10-14

Chili’s international

9

355

36-41

Maggiano’s

1

52

2

Grand total

12

1,658

48-57

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