Brinker International Results

Brinker International Reports Fourth Quarter And Fiscal Year 2019 Results

Brinker International

Brinker International, Inc. (NYSE: EAT) today announced results for the fiscal fourth quarter and year ended June 26, 2019.

Highlights include the following:

  • Earnings per diluted share, on a GAAP basis, in the fourth quarter of fiscal 2019 increased 20.8% to $1.22 compared to $1.01 in the fourth quarter of fiscal 2018. Earnings per diluted share, on a GAAP basis, in fiscal 2019 increased 45.6% to $3.96 compared to $2.72 in fiscal 2018
  • Earnings per diluted share, excluding special items, in the fourth quarter of fiscal 2019 increased 14.3% to $1.36 compared to $1.19 in the fourth quarter of fiscal 2018. Earnings per diluted share, excluding special items, in fiscal 2019 increased 12.3% to $3.93 compared to $3.50 in fiscal 2018 (see non-GAAP reconciliation below)
  • Brinker International's Company sales in the fourth quarter of fiscal 2019 increased 1.7% to $804.8 million compared to the fourth quarter of fiscal 2018. Total revenues in the fourth quarter of fiscal 2019 increased 2.1% to $834.1 million compared to the fourth quarter of fiscal 2018
  • Chili's company-owned comparable restaurant sales increased 1.5% in the fourth quarter of fiscal 2019 compared to the fourth quarter of fiscal 2018. Chili's company-owned comparable restaurant sales increased 2.3% in fiscal 2019 compared to fiscal 2018. Chili's U.S. franchise comparable restaurant sales increased 0.9% in the fourth quarter of fiscal 2019 compared to the fourth quarter of fiscal 2018
  • Maggiano's company-owned comparable restaurant sales decreased 0.2% in the fourth quarter of fiscal 2019 compared to the fourth quarter of fiscal 2018. Maggiano's company-owned comparable restaurant sales increased 0.6% in fiscal 2019 compared to fiscal 2018
  • Chili's international franchise comparable restaurant sales decreased 0.5% in the fourth quarter of fiscal 2019 compared to the fourth quarter of fiscal 2018
  • Operating income, as a percentage of Total revenues, was 7.7% in the fourth quarter of fiscal 2019 compared to 8.6% in the fourth quarter of fiscal 2018 representing a decrease of approximately 90 basis points
  • Restaurant operating margin, as a percentage of Company sales, was 14.9% in the fourth quarter of fiscal 2019 which included the impact of the sale leaseback transactions and adopting the new revenue accounting standard ("ASC 606"), compared to 15.9% in the fourth quarter of fiscal 2018 (see non-GAAP reconciliation below). Excluding the impact of the sale leaseback transactions and ASC 606, Restaurant operating margin in the fourth quarter of fiscal 2019 would have increased to 16.5% (see non-GAAP reconciliation below)
  • Cash flows provided by operating activities in the fifty-two week period ended June 26, 2019 was $212.7 million and capital expenditures totaled $167.6 million resulting in free cash flow of $45.1 million (see non-GAAP reconciliation below) which was reduced by $78.6 million in cash tax payments related to the gain on the sale leaseback transactions. Proceeds from sale leaseback transactions of $485.9 million are included in Cash flows provided by investing activities
  • The Company's Board of Directors approved a quarterly dividend of $0.38 per share on the common stock of the Company. The dividend will be payable September 26, 2019 to shareholders of record as of September 6, 2019

"The fourth quarter marked our 5th consecutive quarter of positive same store sales and our sixth consecutive quarter to out-perform the category in traffic", said Wyman Roberts, CEO and President. "Our continued focus on improving the guest experience and providing everyday value is a long term strategy that continues to deliver solid results."

QUARTERLY OPERATING PERFORMANCE

Company Sales and Company Restaurant Expenses

Chili's Company sales in the fourth quarter of fiscal 2019 increased 2.0% to $701.9 million from $688.2 million in the fourth quarter of fiscal 2018 primarily due to an increase in comparable restaurant sales driven by an increase in To Go sales. As compared to the fourth quarter of fiscal 2018, Chili's restaurant operating margin(1) declined. This was primarily driven by Chili's Restaurant expenses, as a percentage of Company sales, which increased compared to the fourth quarter of fiscal 2018 primarily due to higher rent expenses associated with the new operating leases entered into during fiscal 2019 as part of the sale leaseback transactions and the impact of adopting ASC 606, partially offset by sales leverage. Cost of sales, as a percentage of Company sales, increased compared to the fourth quarter of fiscal 2018 primarily due to unfavorable menu item mix and produce commodity pricing, partially offset by increased menu pricing. These increases were partially offset by Restaurant labor, as a percentage of Company sales, which decreased compared to the fourth quarter of fiscal 2018 due to lower manager expenses, lower employee health insurance expenses and sales leverage impact, partially offset by higher wage rates.

Maggiano's Company sales in the fourth quarter of fiscal 2019 decreased 0.3% to $102.9 million from $103.2 million in the fourth quarter of fiscal 2018 primarily due to a decrease in comparable restaurant sales. As compared to the fourth quarter of fiscal 2018, Maggiano's restaurant operating margin(1) declined. This was primarily driven by Cost of sales, as a percentage of Company sales, which increased compared to the fourth quarter of fiscal 2018 primarily due to unfavorable menu item mix and commodity pricing, partially offset by increased menu pricing. These increases were partially offset by a decrease in Restaurant labor, as a percentage of Company sales, primarily due to lower manager expenses, partially offset by sales deleverage. Restaurant expenses, as a percentage of Company sales remained flat compared to the fourth quarter of fiscal 2018.

Franchise and Other Revenues

Franchise and other revenues in the fourth quarter of fiscal 2019 increased 14.0% to $29.3 million from $25.7 million in the fourth quarter of fiscal 2018 primarily due to the adoption of ASC 606 during fiscal 2019. Please refer to "REVENUE RECOGNITION UPDATE" section below for more details on the new revenue standard. Brinker franchisees generated approximately $331.7 million in sales(2) in the fourth quarter of fiscal 2019.

(2)

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

Other

Depreciation and amortization expenses in the fourth quarter of fiscal 2019 increased $0.4 million compared to the fourth quarter of fiscal 2018 primarily due to additions for existing restaurants primarily related to Chili's remodels, an increase in capital leases, and new restaurants additions, partially offset by an increase in fully depreciated assets, the reduction of restaurants assets sold as part of the sale leaseback transactions and restaurant closures.

General and administrative expenses in the fourth quarter of fiscal 2019 increased $5.2 million compared to the fourth quarter of fiscal 2018 primarily due to higher performance-based compensation expenses and increased rent expenses related to the new corporate headquarters.

Income Taxes

On a GAAP basis, the effective income tax rate in the fourth quarter of fiscal 2019 decreased to 5.1% compared to 20.4% in the fourth quarter of fiscal 2018. This decrease was driven primarily by the positive impact of the lower statutory tax rate due to the Tax Cuts and Jobs Act of 2017 (the "Tax Act") that was enacted during fiscal 2018. The Tax Act lowered the federal statutory tax rate from 35.0% to 21.0% effective January 1, 2018. The decrease was also driven by an increase in the FICA tax credit and foreign tax deduction. Excluding the impact of special items (see non-GAAP reconciliation below for details), the effective income rate decreased to 10.1% in the fourth quarter of fiscal 2019 compared to 19.8% in the fourth quarter of fiscal 2018.

FISCAL 2020 OUTLOOK

We estimate earnings per diluted share, excluding special items, will be in the range of $4.15 to $4.35. We believe providing estimated guidance for fiscal 2020 earnings per diluted share, excluding special items, provides investors the appropriate insight into our ongoing operating performance. Estimated earnings are based on the following:

  • We expect to acquire 116 Chili's restaurants in the first quarter of fiscal 2020 from our franchisee, ERJ Dining. The impact of this acquisition has been included within the fiscal 2020 guidance provided
  • Revenues are expected to be up approximately 9.0% to 10.0% primarily due to the acquisition of the 116 Chili's restaurants
  • Comparable restaurant sales are expected to be up 1.75% to 2.50%
  • Restaurant operating margin is expected to be down approximately 20 basis points to flat
  • Capital expenditures are expected to be $140.0 million to $150.0 million
  • General and administrative expense is expected to remain flat
  • Excluding the impact of special items, the effective income tax rate is expected to be approximately 10.5% to 11.5%
  • Free cash flow is expected to be $160.0 million to $175.0 million
  • Effective fiscal 2020, we have adopted the new US GAAP leasing standard (Topic 842) using the cumulative effect transition method and therefore no prior periods will be restated. We do not expect the new leasing standard to have a significant impact on earnings. The impact of the new leasing standard has been included within the fiscal 2020 guidance provided

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 non-GAAP measures to the corresponding GAAP measures. If special items are reported during fiscal 2020, reconciliations to the appropriate GAAP measures will be provided.

COMPARABLE RESTAURANT SALES

The tables below present the percentage change in company-owned and franchise comparable restaurant sales in the quarter and year-to-date comparative periods as described below:

Q4 19 and Q4 18

Comparable Sales(1)

Price Impact

Mix-Shift(2)

Traffic

Q4: 19 vs 18

Q4: 18 vs 17

Q4: 19 vs 18

Q4: 18 vs 17

Q4: 19 vs 18

Q4: 18 vs 17

Q4: 19 vs 18

Q4: 18 vs 17

Company-owned

1.2

%

0.6

%

3.6

%

(0.7)

%

(1.8)

%

0.6

%

(0.6)

%

0.7

%

Chili's

1.5

%

0.6

%

3.9

%

(1.0)

%

(1.9)

%

0.8

%

(0.5)

%

0.8

%

Maggiano's

(0.2)

%

0.3

%

1.6

%

1.7

%

(0.5)

%

0.2

%

(1.3)

%

(1.6)

%

Chili's franchise(3)

0.4

%

(1.4)

%

U.S.(4)

0.9

%

(0.6)

%

International

(0.5)

%

(2.9)

%

Chili's domestic(4)(5)

1.3

%

0.3

%

System-wide(6)

1.0

%

0.0

%

FY 19 and FY 18

Comparable Sales(1)

Price Impact

Mix-Shift(2)

Traffic

FY: 19 vs 18

FY: 18 vs 17

FY: 19 vs 18

FY: 18 vs 17

FY: 19 vs 18

FY: 18 vs 17

FY: 19 vs 18

FY: 18 vs 17

Company-owned

2.1

%

(1.0)

%

1.7

%

1.3

%

(1.7)

%

1.1

%

2.1

%

(3.4)

%

Chili's

2.3

%

(1.1)

%

1.7

%

1.3

%

(1.7)

%

1.2

%

2.3

%

(3.6)

%

Maggiano's

0.6

%

0.1

%

1.5

%

1.1

%

(0.5)

%

0.6

%

(0.4)

%

(1.6)

%

Chili's franchise(3)(4)

0.1

%

(2.2)

%

U.S.

2.0

%

(1.8)

%

International

(3.0)

%

(2.7)

%

Chili's domestic(5)

2.2

%

(1.3)

%

System-wide(6)

1.5

%

(1.3)

%

(1)

Comparable restaurant sales include all restaurants that have been in operation for more than 18 months. Amounts are calculated based on comparable current period versus same period a year ago.

(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)

Chili's franchise sales generated by franchisees are not included in revenues in the Consolidated Statements of Comprehensive Income; however, we generate royalty revenues 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.

(4)

Chili's franchise U.S. comparable sales and Chili's domestic comparable sales for the Q4: 18 vs 17 period were restated due to a change in franchise reported sales. System-wide comparable sales for the Q4: 18 vs 17 period were not affected by this restatement. Chili's franchise sales for the FY: 18 vs 17 period were restated due to a change in franchise reported sales. Chili's domestic and System-wide comparable sales for the FY: 18 vs 17 period were not affected by this restatement.

(5)

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.

(6)

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.

Reconciliation of Net Income and Earnings Per Share Excluding Special Items

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. The following reconciliations are presented in millions, except per diluted share amounts.

Q4 19 and Q4 18

Q4 19

EPS Q4 19

Q4 18

EPS Q4 18

Net income

$

46.7

$

1.22

$

43.8

$

1.01

Special items (1)

8.7

0.22

9.3

0.21

Income tax effect related to special items (2)

(2.1)

(0.05)

(2.9)

(0.06)

Special items, net of taxes

6.6

0.17

6.4

0.15

Adjustment for special tax items (3)

(1.2)

(0.03)

1.4

0.03

Net income excluding special items

$

52.1

$

1.36

$

51.6

$

1.19

FY 19 and FY 18

FY 19

EPS FY 19

FY 18

EPS FY 18

Net income

$

154.9

$

3.96

$

125.9

$

2.72

Special items (1)

(1.1)

(0.03)

34.5

0.74

Income tax effect related to special items (2)

0.3

0.01

(10.4)

(0.22)

Special items, net of taxes

(0.8)

(0.02)

24.1

0.52

Adjustment for special tax items (3)

(0.6)

(0.01)

12.1

0.26

Net income excluding special items

$

153.5

$

3.93

$

162.1

$

3.50

(1)

Special items in the fourth quarter of fiscal 2019 consist of a $7.9 million charge in Other (gains) and charges, and a $0.8 million of incremental depreciation expenses associated with a change in estimated useful life of certain restaurant-level long-lived assets. Special items in the fourth quarter of fiscal 2018 consist of a $9.3 million charge in Other (gains) and charges.

Special items in fiscal 2019 consist of a $4.5 million gain in Other (gains) and charges, partially offset by $3.4 million of incremental depreciation expenses associated with a change in estimated useful life of certain restaurant-level long-lived assets. Special items in fiscal 2018 consist of a $34.5 million charge in Other (gains) and charges.

Footnote "(2)" to the Consolidated Statements of Comprehensive Income contains additional details on the composition of Other (gains) and charges for each period presented.

(2)

Income tax effect related to special items is based on the statutory tax rate in effect at the end of each period presented.

(3)

Adjustment for special tax items in the fourth quarter of fiscal 2019 primarily relates to favorable resolution of liabilities established for uncertain tax positions and realization of tax benefits not previously recognized. Adjustment for special tax items in the fourth quarter of fiscal 2018 primarily relates to the tax impact from the Tax Act re-measurement of deferred taxes resulting from the tax rate decrease from 35.0% to 21.0% and the tax impact from IRS settlements and excess tax shortfalls associated with stock-based compensation.

Adjustment for special tax items in fiscal 2019 primarily relates to favorable resolution of liabilities established for uncertain tax positions, realization of tax benefits not previously recognized and tax shortfalls associated with stock based compensation. Adjustment for special tax items in fiscal 2018 primarily relates to the tax impact from the Tax Reform re-measurement of deferred taxes resulting from the tax rate decrease from 35.0% to 21.0% and the tax impact from IRS settlements and excess tax shortfalls associated with stock-based compensation.

Reconciliation of Restaurant Operating Margin

Restaurant operating margin is not a measurement determined in accordance with GAAP and should not be considered in isolation, or as an alternative to operating income as an indicator of financial performance. Restaurant operating margin is widely regarded in the restaurant industry as a useful metric by which to evaluate restaurant-level operating efficiency and performance of ongoing restaurant-level operations. This non-GAAP measure is not indicative of overall company performance and profitability in that this measure does not directly accrue benefit to the shareholders due to the nature of costs excluded. We define Restaurant operating margin as Company sales less Company restaurant expenses, including Cost of sales, Restaurant labor and Restaurant expenses. We believe this metric provides a more useful comparison between periods and enables investors to focus on the performance of restaurant-level operations by excluding revenues not related to food and beverage sales at company-owned restaurants, corporate General and administrative expenses, Depreciation and amortization, and Other (gains) and charges.

Restaurant operating margin excludes Franchise and other revenues which are earned primarily from franchise royalties and other non-food and beverage revenue streams such as banquet service charges, digital entertainment revenues and gift card breakage. Depreciation and amortization expenses, substantially all of which is related to restaurant-level assets, is excluded because such expenses represent historical costs which do not reflect current cash outlays for the restaurants. General and administrative expenses include primarily non-restaurant-level costs associated with support of the restaurants and other activities at our corporate offices and are therefore excluded. We believe that excluding special items, included within Other (gains) and charges, from Restaurant operating margin provides investors with a clearer perspective of the Company's ongoing operating performance and a more useful comparison to prior period results. Restaurant operating margin as presented may not be comparable to other similarly titled measures of other companies in our industry.

The adoption of the new revenue standard, ASC 606, in fiscal 2019 changed the presentation and recording of certain items contained within Franchise and other revenues, Operating income, and Restaurant operating margin. The adoption did not have a significant impact. For more details about the impact of adopting the new revenue standard please refer to the "REVENUE RECOGNITION UPDATE" section below. The following reconciliations are presented in millions, except percentages.

Q4 19 and Q4 18

Q4 19

Adjustments (1)

Q4 19 Adjusted

Q4 18

Operating income - GAAP

$

64.0

$

$

64.0

$

70.4

Operating income as a percentage of Total revenues

7.7

%

%

7.7

%

8.6

%

Operating income - GAAP

$

64.0

$

6.3

$

70.3

$

70.4

Less:  Franchise and other revenues

(29.3)

6.9

(22.4)

(25.7)

Plus:  Depreciation and amortization

38.1

38.1

37.7

General and administrative

39.1

39.1

33.9

Other (gains) and charges

7.9

7.9

9.3

Restaurant operating margin - non-GAAP

$

119.8

$

13.2

$

133.0

$

125.6

Restaurant operating margin as a percentage of Company sales

14.9

%

1.6

%

16.5

%

15.9

%

FY 19 and FY 18

FY 19

Adjustments (1)

FY 19 Adjusted

FY 18

Operating income - GAAP

$

230.7

$

$

230.7

$

226.1

Operating income as a percentage of Total revenues

7.2

%

%

7.2

%

7.2

%

Operating income - GAAP

$

230.7

$

26.1

$

256.8

$

226.1

Less:  Franchise and other revenues

(111.7)

24.6

(87.1)

(93.9)

Plus:  Depreciation and amortization

147.6

147.6

151.4

General and administrative

149.1

149.1

136.0

Other (gains) and charges

(4.5)

(4.5)

34.5

Restaurant operating margin - non-GAAP

$

411.2

$

50.7

$

461.9

$

454.1

Restaurant operating margin as a percentage of Company sales

13.2

%

1.7

%

14.9

%

14.9

%

(1)

Adjustments include the impact of the Q4 19 and FY 19 additional rent expense associated with the sale leaseback transactions, and the impact of adopting ASC 606.

Reconciliation of Free Cash Flow

FY 19

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

Fifty-Two Week

Period Ended

June 26, 2019

Cash flows provided by operating activities - GAAP

$

212.7

Capital expenditures

(167.6)

Free cash flow - non-GAAP

$

45.1

During the fifty-two week period ended June 26, 2019, Cash flows provided by operating activities - GAAP included a reduction of $78.6 million cash tax payments related to the gain on the sale leaseback transactions. The cash proceeds received from the sale leaseback transactions of $485.9 million are recorded in Cash flows provided by investing activities during the fifty-two week period ended June 26, 2019.

ABOUT BRINKER

Brinker International, Inc. is one of the world's leading casual dining restaurant companies. Based in Dallas, Texas, as of June 26, 2019, Brinker owned, operated, or franchised 1,665 restaurants under the names Chili's® Grill & Bar (1,612 restaurants) and Maggiano's Little Italy® (53 restaurants).



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