Brinker International Reports Year-Over-Year Increases In Fourth Quarter And Full Fiscal Year EPS; Fourth Quarter Comparable Restaurant Sales Up 2.3 Percent

Brinker International, Inc. (NYSE: EAT) announced results for the fiscal fourth quarter ended June 25, 2014.

Highlights include the following:

• Earnings per diluted share, excluding special items, increased 10.4 percent to $0.85 compared to $0.77 for the fourth quarter of fiscal 2013. Earnings per diluted share, excluding special items, increased 15.8 percent to $2.71 compared to $2.34 for the full year fiscal 2013 (see non-GAAP reconciliation below)


• On a GAAP basis, earnings per diluted share decreased to $0.43 compared to $0.64 for the fourth quarter of fiscal 2013 driven primarily by pre-tax charges of $39.5 million recorded to establish reserves for the potential settlement of various litigation matters.  On a GAAP basis, earnings per diluted share increased to $2.26 compared to $2.20 for the full year fiscal 2013


• Brinker International company sales increased 3.7 percent to $735.0 million and comparable restaurant sales at company-owned restaurants increased 2.3 percent


• Chili's company-owned comparable restaurant sales increased 2.5 percent


• Maggiano's comparable restaurant sales increased 0.9 percent, representing the 18th consecutive quarterly increase


• Chili's franchise comparable restaurant sales increase of 1.2 percent includes a 1.4 percent increase for U.S. franchise restaurants and a 0.8 percent increase for international franchise restaurants, representing the 18th consecutive quarterly increase for international franchise restaurants


• For fiscal 2014, cash flows provided by operating activities were $359.8 million and capital expenditures totaled $161.1 million


• The company repurchased approximately 0.9 million shares of its common stock for $47.8 million in the fourth quarter and a total of approximately 5.1 million shares for $239.6 million year-to-date


• The company paid a dividend of 24 cents per share in the fourth quarter, an increase of 20 percent over the prior year fourth quarter

"We closed fiscal 2014 with an increase in earnings per diluted share of 15.8 percent, our fourth consecutive year of double-digit growth in a competitive environment," said Wyman Roberts, Chief Executive Officer and President. "These results demonstrate our ability to deliver sustained value to our shareholders."

Quarterly Operating Performance

CHILI'S fourth quarter company sales increased to $639.8 million from $615.7 million in the prior year primarily due to increases in comparable restaurant sales, the acquisition of 11 restaurants in Canada at the end of the prior fiscal year, as well as increases in restaurant capacity.  As compared to the prior year, the Chili's operating margin metric was negatively impacted by the classification of revenues and expenses associated with Ziosk. The revenues associated with Ziosk are included in Franchise and other revenues while the associated expense is included in Restaurant expenses, a component of the margin calculation. Restaurant expenses, as a percent of company sales, increased due to Ziosk equipment charges, new restaurant development and higher advertising, partially offset by leverage related to higher revenue. Restaurant labor, as a percent of company sales, was negatively impacted by increased overtime and training, partially offset by leverage related to higher revenue. Cost of sales, as a percent of company sales, was favorably impacted by menu pricing, menu item changes, improved waste control, and efficiency gains related to new fryer equipment, partially offset by unfavorable pricing primarily related to cheese, avocados and limes which are market based.

MAGGIANO'S fourth quarter company sales of $95.2 million increased 1.9 percent primarily driven by increases in restaurant capacity, menu pricing and traffic. As compared to the prior year, Maggiano's restaurant operating margin was negatively impacted by higher facilities costs and new restaurant development. Cost of sales, as a percent of company sales, was negatively impacted by unfavorable mix changes and commodity pricing on seafood, partially offset by increased menu pricing and favorable commodity pricing on bread and other items. Restaurant labor, as a percent of company sales, was positively impacted by lower performance based compensation.

FRANCHISE AND OTHER revenues totaled $23.7 million for the fourth quarter, an increase of 13.4 percent compared to $20.9 million in the prior year driven primarily by the revenues associated with Ziosk. U.S. franchise comparable restaurant sales increased 1.4 percent and international comparable restaurant sales increased 0.8 percent. Brinker franchisees generated approximately $423 million in sales¹ for the fourth quarter of fiscal 2014. 

Other

Depreciation and amortization expense increased $2.5 million for the quarter primarily due to investments in the Chili's reimage program, fryer equipment, new restaurant openings, as well as the acquisition of 11 restaurants in Canada at the end of the prior fiscal year, partially offset by an increase in fully depreciated assets.

General and administrative expense increased $1.1 million primarily due to information technology expenses in support of sales driving initiatives and tax consulting costs.

Other gains and charges in the fourth quarter of fiscal 2014 includes pre-tax charges of approximately $39.5 million related to various litigation matters including a class action litigation pending in California.  In August 2004, certain current and former hourly restaurant team members filed a putative class action lawsuit against Brinker in California Superior Court alleging violations of California labor laws with respect to meal periods and rest breaks.  The parties participated in mediation regarding this case on April 8, 2014, where preliminary settlement discussions began that ultimately culminated in a preliminary settlement agreement being reached on Aug. 6, 2014.  This preliminary settlement agreement remains subject to court approval and seeks to resolve all claims in exchange for a maximum settlement payment not to exceed $56.5 million.  The company established a reserve of approximately $39.0 million related to this pending class action litigation, but the actual amount of any settlement payment could vary from the company's reserve and will be subject to many factors including approval by the court, claims process, and other matters typically associated with the potential settlement of complex class action litigation.  The aggregate litigation reserves of approximately $39.5 million established in the fourth quarter are based on the terms set forth in the applicable agreements and the company's reasonable expectations regarding future events.

On a GAAP basis, the effective income tax rate decreased to 18.1 percent in the current quarter from 25.0 percent in the prior year primarily due to the impact of tax benefits related to special items in the current quarter. Excluding the impact of special items, the effective income tax rate increased to 29.4 percent in the current quarter compared to 28.3 percent in the prior year primarily due to an increase in the amount of reserves established for uncertain tax positions.

Non-GAAP Reconciliation

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. Special items in the fourth quarter of fiscal 2014 consist primarily of charges related to litigation reserves, the impairment of restaurants, as well as charges associated with closed restaurants.

Fiscal 2015 Outlook

• The company anticipates earnings per diluted share, excluding special items, to increase 11 to 16 percent in the range of $3.00 to $3.15. Earnings are based on the following expectations:


• Comparable restaurant sales are expected to increase one to two percent


• Company-owned new restaurant development is expected to add year-over-year capacity growth of about one percent


• Restaurant operating margin is expected to improve 25 to 50 basis points year-over-year


• Depreciation expense is expected to increase $10 to $12 million, assuming capital expenditures of $130 to $140 million


• General and administrative expense is expected to be $10 million higher on a dollar basis due to planning incentive compensation at target coupled with information technology expenses related to sales driving initiatives


• Interest expense is expected to increase slightly due to a higher debt balance in fiscal 2015


• Excluding the impact of special items, and assuming governmental renewal of the work opportunity tax credit retroactive to January 2014, the effective income tax rate is projected to be approximately 31 percent


• Free cash flow is expected to be $180 to $190 million


• Diluted weighted average shares outstanding is expected to be 64 to 66 million

The company believes providing fiscal 2015 earnings per diluted share guidance provides investors the appropriate insight into the company's ongoing operating performance.

Guidance Policy

Brinker provides annual guidance as it relates to comparable restaurant sales, earnings per diluted share, and other key line items in the comprehensive income statement and will only provide updates if there is a material change versus the original guidance. Consistent with prior practice, management will not discuss intra-period sales or other key operating results not yet reported as the limited data may not accurately reflect the final results of the period or quarter referenced.

Forward Calendar

-  SEC Form 10-K for fiscal 2014 filing on or before Aug. 25, 2014; and
-  First quarter earnings release, before market opens, Oct. 21, 2014.

About Brinker

Brinker International, Inc. is one of the world's leading casual dining restaurant companies. Founded in 1975 and based in Dallas, Texas, as of June 25, 2014, Brinker owned, operated, or franchised 1,615 restaurants under the names Chili's^® Grill & Bar (1,569 restaurants) and Maggiano's Little Italy^® (46 restaurants).