Brinker International Announces Second Quarter Fiscal 2008 Results
During the first quarter of fiscal 2008, the company began presenting Romano's Macaroni Grill as discontinued operations in its financial statements due to management's intent to sell the brand. Before special items, earnings per diluted share from discontinued operations increased 57 percent from $0.07 in the second quarter of fiscal 2007 to $0.11 in the current quarter (reconciliation included in Table 3). All amounts presented in this release are related to continuing operations unless otherwise stated.
Highlights for the second quarter fiscal 2008: -- Sold 76 Chili's restaurants to ERJ Dining IV, LLC; -- Increased royalty revenues from franchisees by 57 percent; -- Built 18 new company-owned restaurants and saw franchisees build 27 new restaurants; -- Entered into an agreement with CMR, SAB de CV for the joint investment in a new corporation to develop 50 Chili's Grill & Bar and Maggiano's Little Italy restaurants in Mexico, 6 of which have recently opened; -- Increased quarterly dividend by 22 percent to $0.11 per share; and -- Repurchased 4.1 million common shares.
Doug Brooks, Chairman and CEO stated, Brinker is committed to focusing on improving our core operations and to building on the strong foundations of our brands that will enable us to be successful in all macro-economic environments. We are confident that the operational and financial strategies we have initiated during the past eighteen months, including refranchising of company-owned restaurants, closing of underperforming locations, divestiture of brands, reimage of Chili's restaurants, international growth, aggressive share repurchases and growth of our dividend program, will have a positive impact on the company's performance in the future. We are now determining which initiatives can be accelerated and what additional actions can be taken to deliver more consistent earnings growth for our shareholders.
Brinker reported revenues from continuing operations for the 13-week period of $868.2 million, a decrease of 3.5 percent compared with $899.6 million reported for the same period of fiscal 2007. The decrease in revenue was driven by a 2.1 percent decline in comparable restaurant sales (see Table 1). Additionally, growth in company-owned restaurants was more than offset by sales of restaurants to franchisees, resulting in a net decline in capacity of approximately 3 percent. As a result, royalty revenues from franchisees increased 57 percent to $13.7 million from $8.7 million in the prior year. In addition, the company recognized $6.3 million of franchise and development fee revenues during the second quarter of fiscal 2008.
Table 1: Q2 comparable restaurant sales Q2 08 and Q2 07, company and three reported brands; percentage Q2 08 Q2 07 Q2 08 Comparable Comparable Pricing Q2 08 Sales Sales Impact Mix-Shift Brinker International(1) (2.1) (1.4) 2.8 0.3 Chili's (2.4) (1.2) 2.8 0.9 On The Border (4.3) (3.6) 2.2 0.1 Maggiano's 1.7 (1.3) 3.1 (2.7) (1) Brinker International comparable restaurant sales exclude the impact of Macaroni Grill.
Quarterly Operating Performance
Cost of sales, as a percent of revenues, increased from 28.0 percent in the prior year to 28.2 percent in the second quarter of fiscal 2008. During the quarter, cost of sales was negatively impacted by unfavorable commodity prices, primarily beef, ribs, cheese and dairy products, and unfavorable product mix shifts related to new menu items, offset by favorable menu price changes and increased revenues from franchisees.
Restaurant expenses, as a percent of revenues, increased to 56.1 percent from 54.8 percent in the prior year primarily driven by increased labor and restaurant supply costs, partially offset by increased revenues from franchisees and lower pre-opening expenses.
Depreciation and amortization decreased $1.7 million primarily driven by the sale of 95 company-owned Chili's restaurants to Pepper Dining, Inc. in the fourth quarter of fiscal 2007 and the sale of 76 company-owned Chili's restaurants to ERJ Dining IV, LLC in the second quarter of fiscal 2008. An increase in fully depreciated assets and restaurant closures also contributed to the decrease. These decreases were partially offset by an increase in depreciation due to the addition of new restaurants and remodel investments.
Compared to the prior year, general and administrative expense decreased $5.4 million for the quarter primarily due to lower performance and stock-based compensation expenses.
Other gains and charges increased to a net gain of $21.9 million compared to charges of $2.0 million a year ago as a result of a $29.2 million gain recorded in the second quarter of fiscal 2008 related to the sale of 76 Chili's restaurants to ERJ, partially offset by $7.3 million in charges primarily related to long-lived asset impairments.
Interest expense increased $5.9 million primarily due to additional debt outstanding of $400 million borrowed under a three-year term loan used primarily to fund share repurchases in fiscal 2007 and for general corporate purposes.
The effective income tax rate for continuing operations, before special items, decreased to 29.0 percent for the current quarter as compared to 32.8 percent for the same quarter last year. The decrease in the tax rate was primarily due to an increase in federal tax credits, leverage from FICA tip credits and a decrease in incentive stock option expense.
Income from discontinued operations, before special items, increased to $11.8 million in the current quarter from $8.6 million a year ago (reconciliation included in Table 3). This increase was primarily driven by a decrease in depreciation expense due to the classification of assets held for sale beginning in fiscal 2008, partially offset by a 4.0 percent decline in comparable restaurant sales at Macaroni Grill, which also resulted in the de-leveraging of fixed costs.
Cash Flow and Capital Allocation
Cash flow from continuing operations for the first six months of fiscal 2008 decreased to approximately $214.4 million compared to $256.6 million in the prior year due to lower adjusted earnings and the timing of operational receipts and payments. Capital expenditures for continuing operations for the quarter totaled $149.4 million, a reduction of $36.5 million compared to the prior year, primarily due to a decrease in new restaurants developed by the company. The company repurchased 4.1 million common shares during the second quarter. At the end of the quarter, approximately $60 million remained available under the company's share authorizations. Diluted weighted average shares outstanding for the second quarter were reduced over 16 percent to 105.3 million from 126.6 million at the end of the second quarter fiscal 2007.
As of the end of the second quarter of fiscal 2008, the company is in compliance with all debt covenants and believes that cash flows from its continuing operations and the strength of its balance sheet are adequate to support existing obligations and to finance ongoing operations.
Special Items Table 2: Reconciliation of income from continuing operations, before special items Q2 08 and Q2 07; $ millions and $ per diluted share after-tax EPS EPS Per Per $ Share $ Share Item Q2 08 Q2 08 Q2 07 Q2 07 Income from Continuing Operations 46.2 0.44 41.0 0.32 Other Gains and Charges (13.8) (0.13) 1.3 0.01 Income from Continuing Operations, before Special Items 32.4 0.31 42.3 0.33 Table 3: Reconciliation of income from discontinued operations, before special items Q2 08 and Q2 07; $ millions and $ per diluted share after-tax EPS EPS Per Per $ Share $ Share Item Q2 08 Q2 08 Q2 07 Q2 07 Income from Discontinued Operations 8.3 0.08 3.2 0.03 Other Gains and Charges 3.5 0.03 5.4 0.04 Income from Discontinued Operations, before Special Items 11.8 0.11 8.6 0.07 Table 4: Reconciliation of net income, before special items Q2 08 and Q2 07; $ millions and $ per diluted share after-tax EPS EPS Per Per $ Share $ Share Item Q2 08 Q2 08 Q2 07 Q2 07 Net Income 54.5 0.52 44.2 0.35 Other Gains and Charges (10.3) (0.10) 6.7 0.05 Net Income, before Special Items 44.2 0.42 50.9 0.40
Investors and interested parties are invited to listen to today's conference call, as management will provide further details of the quarter. The call will be broadcast live on the Brinker Web site (http://www.brinker.com) at 9 a.m. CST today (Jan. 23). For those who are unable to listen to the live broadcast, a replay of the call will be available shortly thereafter and will remain on the Brinker Web site until the end of the day on Feb. 20, 2008.
Forward Calendar -- Second Quarter SEC Form 10-Q filing on or before Feb. 4, 2008; and -- Third quarter earnings release, before market opens, on Apr. 22, 2008.
At the end of the second quarter of fiscal 2008, Brinker International either owned, operated, or franchised 1,872 restaurants under the names Chili's Grill & Bar (1,419 units), Romano's Macaroni Grill (245 units), On The Border Mexican Grill & Cantina (167 units), and Maggiano's Little Italy (41 units).
The statements contained in this release that are not historical facts are forward-looking statements. These forward-looking statements involve risks and uncertainties and, consequently, could be affected by general business and economic conditions, the impact of competition, the impact of mergers, acquisitions, divestitures and other strategic transactions, the seasonality of the company's business, adverse weather conditions, future commodity prices, fuel and utility costs and availability, terrorists acts, consumer perception of food safety, changes in consumer taste, health epidemics or pandemics, changes in demographic trends, availability of employees, unfavorable publicity, the company's ability to meet its growth plan, acts of God, governmental regulations, and inflation.
BRINKER INTERNATIONAL, INC. Consolidated Statements of Income (In thousands, except per share amounts) (Unaudited) Thirteen Week Periods Ended Twenty-Six Week Periods Ended December 26, December 27, December 26, December 27, 2007 2006 2007 2006 Revenues $868,206 $899,571 $1,763,292 $1,768,854 Operating Costs and Expenses: Cost of sales 245,283 251,901 490,901 490,316 Restaurant expenses 486,871 493,132 989,024 974,134 Depreciation and amortization 39,089 40,825 77,624 81,055 General and administrative 39,620 44,973 80,558 93,113 Other gains and charges (a) (21,948) 2,031 (21,436) (1,210) Total operating costs and expenses 788,915 832,862 1,616,671 1,637,408 Operating income 79,291 66,709 146,621 131,446 Interest expense 12,476 6,614 25,391 12,851 Other, net (845) (795) (2,102) (1,632) Income before provision for income taxes 67,660 60,890 123,332 120,227 Provision for income taxes 21,434 19,900 38,570 39,165 Income from continuing operations 46,226 40,990 84,762 81,062 Income from discontinued operations, net of taxes (b) 8,254 3,202 7,318 10,769 Net income $54,480 $44,192 $92,080 $91,831 Basic net income per share: Income from continuing operations $0.45 $0.33 $0.81 $0.65 Income from discontinued Operations $0.08 $0.03 $0.07 $0.09 Net income per share $0.53 $0.36 $0.88 $0.74 Diluted net income per share: Income from continuing operations $0.44 $0.32 $0.79 $0.64 Income from discontinued operations $0.08 $0.03 $0.07 $0.09 Net income per share $0.52 $0.35 $0.86 $0.73 Basic weighted average shares outstanding 103,498 123,451 104,981 123,835 Diluted weighted average shares outstanding 105,339 126,641 107,247 126,339 (a) Current year other gains and charges primarily includes a $29.2 million gain on the sale of 76 restaurants to a franchisee and $7.3 million of charges primarily related to the impairment of long-lived assets during the second quarter of fiscal 2008. Prior year other gains and charges includes $2.0 million of impairment charges associated with restaurant closures in the second quarter of fiscal 2007 and a gain on the termination of interest rate swaps of $3.2 million in the first quarter of fiscal 2007. (b) Income from discontinued operations, net of taxes, includes other gains and charges of $3.5 million in the second quarter of fiscal 2008, primarily related to impairment charges and deal-related expenses resulting from the expected sale of Macaroni Grill and $5.1 million in the first quarter of fiscal 2008, primarily related to impairment charges and stock-based compensation expense resulting from the expected sale of Macaroni Grill. Income from discontinued operations, net of taxes, includes other gains and charges of $5.4 million in the second quarter of fiscal 2007, primarily related to impairment charges associated with restaurant closures. As a result, income from discontinued operations, before special items, was $11.8 million and $8.6 million for the second quarter of fiscal 2008 and 2007, respectively. Income from discontinued operations, before special items, was $15.9 and $16.2 million, respectively, for fiscal 2008 and 2007 year-to-date. BRINKER INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) December 26, June 27, 2007 2007 (Unaudited) ASSETS Current assets of continuing operations $292,281 $250,478 Assets held for sale 303,054 417,842 Net property and equipment (a) 1,522,362 1,469,586 Total other assets 199,945 180,115 Total assets $2,317,642 $2,318,021 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities of continuing operations $602,326 $521,136 Liabilities associated with assets held for sale 19,354 21,046 Long-term debt, less current installments 884,414 826,918 Other liabilities 166,659 143,832 Total shareholders' equity 644,889 805,089 Total liabilities and shareholders' equity $2,317,642 $2,318,021 (a) At December 26, 2007, the company owned the land and buildings for 231 of the 1,048 company-owned restaurants (excluding Macaroni Grill). The net book values of the land and buildings associated with these restaurants totaled $184.3 million and $195.4 million, respectively. BRINKER INTERNATIONAL, INC. RESTAURANT SUMMARY Second Total Second Quarter Quarter Total Projected Restaurants Openings/ Closings/ Restaurants Openings Sept. 26, Acquisitions Sales Dec. 26, Fiscal 2007 Fiscal 2008 Fiscal 2008 2007 2008 Company-Owned Restaurants: Chili's 930 14 79 865 64-67 Macaroni Grill 216 3 3 216 3 On The Border 134 3 - 137 6-8 Maggiano's 41 0 - 41 1 International(a) 5 1 - 6 0-3 1,326 21 82 1,265 74-82 Franchise Restaurants: Chili's 308 87 - 395 28-33 Macaroni Grill 13 4 - 17 7-9 On The Border 28 1 - 29 6-8 International(a) 151 16 1 166 37-45 500 108 1 607 78-95 Total Restaurants: Chili's 1,238 101 79 1,260 92-100 Macaroni Grill 229 7 3 233 10-12 On The Border 162 4 - 166 12-16 Maggiano's 41 0 - 41 1 International 156 17 1 172 37-48 1,826 129 83 1,872 152-177 (a) At the end of second quarter fiscal year 2008, international company owned restaurants by brand were five Chili's and one Macaroni Grill. International franchise restaurants by brand were 154 Chili's, 11 Macaroni Grill's and one On The Border. FOR ADDITIONAL INFORMATION, CONTACT: MARIE PERRY INVESTOR RELATIONS (972) 770-1276 6820 LBJ FREEWAY DALLAS, TEXAS 75240
SOURCE Brinker International, Inc.