Brinker International, Inc: Form 10-Q for the period ended Dec 27, 2023

General

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand our Company, our operations and our current operating environment. For an understanding of the significant factors that influenced our performance during the thirteen and twenty-six week periods ended December 27, 2023 and December 28, 2022, the MD&A should be read in conjunction with the Consolidated Financial Statements (Unaudited) and related Notes to Consolidated Financial Statements (Unaudited) included in this quarterly report. All amounts within the MD&A are presented in millions unless otherwise specified.

Overview

The Company is principally engaged in the ownership, operation, development and franchising of the Chili’s® Grill & Bar (“Chili’s”) and Maggiano’s Little Italy® (“Maggiano’s”) restaurant brands. As of December 27, 2023, we owned, operated or franchised 1,658 restaurants, consisting of 1,184 Company-owned restaurants and 474 franchised restaurants, located in the United States, 29 other countries and two United States territories. Our restaurant brands, Chili’s and Maggiano’s, are both operating segments and reporting units.

External Impacts to Our Operating Environment

Our operating results were impacted by geopolitical and other macroeconomic events, leading to higher than usual inflation on wages and food and beverage costs during fiscal 2023 and to a lesser extent during the first and second quarters of fiscal 2024.

Operations Strategy

We are committed to strategies and a Company culture that we believe will grow sales, increase profits, bring back guests and engage team members. Our strategies and culture are intended to strengthen our position in casual dining and grow our core business over time. Our primary brand strategy is to make our guests feel special through great food and quality service so that they return to our restaurants.

Chili’s - Our strategy is to make everyone feel special through a fun atmosphere, delicious food and drinks and our Chili’s hospitality. We are making work at Chili’s easier, more fun and more rewarding for our team members so that they are more engaged and provide a better experience for our guests. One way we have done this is by eliminating tasks that were unnecessary and did not add value to our guests. We have also simplified our menu to focus on core equities we believe can help grow sales—burgers, fajitas, Chicken Crispers®, and margaritas, as well as other classic favorites. Our team members can make our core menu items better and more consistently because we have fewer menu items that need to be perfected.

We have a flexible platform of value offerings at both lunch and dinner that we believe is compelling to our guests. Our “3 for Me” platform, a flexible value bundle provides our guests an unbeatable everyday value, while allowing us to be more flexible in terms of pricing, in light of the inflationary challenges. Additionally, we have continued our Margarita of the Month promotion that features a premium-liquor margarita every month at an every-day value price. Most of our value propositions are available for guests to enjoy in our dining rooms or off-premise.

In dining rooms, we use tabletop devices to engage our guests at the table. These devices provide functionality for guests to pay at the table, order or re-order, engage in digital entertainment, to provide guest feedback and interact with our My Chili’s Rewards program. Our My Chili’s Rewards loyalty program offers free chips and salsa or a non-alcoholic beverage to members based on their visit frequency. We customize offerings for these guests based on their purchase behavior. Our servers use handheld tablets to place orders for our guests, increasing the efficiency of our team members and allowing orders to reach our kitchen quicker for better service to our guests. Third-party delivery orders for our restaurants are sent directly into our point of sale system, creating efficiencies and a system that allows us to better serve our guests. The operating results for our virtual brand, It’s Just Wings®, are included in the results of our Chili’s brand, based on the restaurants that prepared and processed the food orders.

Maggiano’s - At Maggiano’s, we are focused on making our guests feel special. This warm and generous hospitality creates an environment where guests come together to celebrate birthdays, weddings and many more special occasions. While our dining rooms support the majority of our business, we have focused on increasing our carry-out and delivery business in recent years, including through partnerships with delivery service providers that have made our restaurants more accessible to guests and helped create an additional significant revenue channel. Our restaurants also have banquet rooms to host large party events and we have begun to renovate these banquet rooms in certain restaurants to provide a better experience for this profitable revenue channel, particularly during the holiday season in the second and third quarters of the fiscal year.

Franchise Partnerships - Our franchisees continue to grow our brands around the world, opening 14 restaurants and two new development agreements for the twenty-six week period ended December 27, 2023. We plan to strategically pursue expansion of Chili’s internationally through development agreements with new and existing franchise partners.

Company Development - The following table details the number of restaurant openings during the thirteen and twenty-six week periods ended December 27, 2023 and December 28, 2022, respectively, total full year projected openings in fiscal 2024 and the total restaurants open at each period end:

At December 27, 2023, we own property for 50 of the 1,184 Company-owned restaurants and one closed restaurant. The net book values associated with these restaurants included land of $42.5 million and buildings of $11.7 million.

Revenues

Thirteen and Twenty-Six Week Periods Ended December 27, 2023 compared to December 28, 2022

Revenues are presented in two separate captions in the Consolidated Statements of Comprehensive Income (Loss) (Unaudited) to provide more clarity around Company-owned restaurant revenues and operating expenses trends:

• Company sales include revenues generated by the operation of Company-owned restaurants including food and beverage sales, net of discounts, Maggiano’s banquet service charge income, gift card breakage, delivery, digital entertainment revenues, merchandise income and are net of gift card discounts from third-party gift card sales.
• Franchise revenues include royalties, franchise advertising fees, franchise and development fees and gift card equalization.

The following is a summary of the change in Total revenues:

(1) Franchise revenues increased in the thirteen and twenty-six week periods ended December 27, 2023 compared to December 28, 2022 primarily because of higher franchise advertising fees. Our Chili’s and Maggiano’s franchisees generated sales of approximately $216.9 million and $2.8 million and $426.2 million and $5.6 million, respectively, for the thirteen and twenty-six week periods ended December 27, 2023 compared to $213.4 million and $2.6 million and $419.0 million and $5.0 million, respectively, in for the thirteen and twenty-six week periods ended December 28, 2022.

The table below presents the percentage change in comparable restaurant sales and restaurant capacity for the thirteen and twenty-six week periods ended December 27, 2023 compared to December 28, 2022:

(1) Comparable Restaurant Sales include all restaurants that have been in operation for more than 18 full months. Restaurants temporarily closed 14 days or more are excluded from Comparable Restaurant Sales. Percentage amounts are calculated based on the comparable periods year-over-year.

(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) Restaurant Capacity is measured by sales weeks and is calculated based on comparable periods year-over-year.

(4) Franchise sales generated by franchisees are not included in Total revenues in the Consolidated Statements of Comprehensive Income (Loss) (Unaudited); however, we generate royalty revenues and advertising fees based on franchisee revenues, where applicable. We believe presenting Franchise Comparable Restaurant Sales provides investors relevant information regarding total brand performance.

(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 Chili’s and Maggiano’s Company-owned and franchise-operated restaurants.

Costs and Expenses

Thirteen Week Period Ended December 27, 2023 compared to December 28, 2022

The following is a summary of the changes in Costs and Expenses:

As a percentage of Company sales:

• Food and beverage costs were favorable 3.0%, due to 1.9% from increased menu pricing, 0.8% of favorable commodity costs driven primarily by lower poultry and produce costs, partially offset by higher beverage costs, and 0.3% of favorable menu item mix.
• Restaurant labor was unfavorable 0.4%, due to 1.4% of higher hourly labor expenses driven by increased wage rates and staffing levels, and 0.6% of higher manager salaries, partially offset by 1.6% of sales leverage.
• Restaurant expenses were unfavorable 1.1%, due to 2.2% of higher advertising, 0.5% of higher repairs and maintenance, 0.2% of higher rent, and 0.2% of higher other restaurant expenses, partially offset by 1.0% of sales leverage and 1.0% of lower delivery fees and to-go supplies.

Depreciation and amortization decreased $0.5 million as follows:

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General and administrative expenses increased $7.6 million as follows:

(1) Stock-based compensation increased compared to the prior year primarily due to the impact of reversing expense associated with a performance share award in the second quarter of fiscal 2023, when we determined the performance target was not achievable.

Other (gains) and charges consisted of the following (for further details, refer to Note 11 - Other Gains and Charges):

Interest expenses increased $2.8 million due to higher interest rates on the 8.250% notes, offset slightly by lower long-term debt outstanding.

Twenty-Six Week Period Ended December 27, 2023 compared to December 28, 2022

The following is a summary of the changes in Costs and Expenses:

As a percentage of Company sales:

• Food and beverage costs were favorable 3.8%, due to 2.2% from increased menu pricing, 0.8% of favorable menu item mix and 0.8% of favorable commodity costs driven primarily by lower poultry costs, partially offset by higher beverage costs.
• Restaurant labor was unfavorable 0.1%, due to 1.3% of higher hourly labor expenses driven by increased wage rates and staffing levels, and 0.6% of higher manager salaries partially offset by 1.7% of sales leverage and 0.1% of lower other labor expenses.
• Restaurant expenses were unfavorable 0.8%, due to 2.1% of higher advertising, 0.4% of higher repairs and maintenance expenses, 0.2% of higher higher workers’ compensation and general liability insurance, 0.4% of higher other restaurant expenses, partially offset by 1.2% of sales leverage and 1.1% of lower delivery fees and to-go supplies.

Depreciation and amortization decreased $0.5 million as follows:

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General and administrative expenses increased $10.5 million as follows:

(1) Stock-based compensation increased compared to the prior year primarily due to the impact of reversing expense associated with a performance share award in the second quarter of fiscal 2023, when we determined the performance target was not achievable.

Other (gains) and charges consisted of the following (for further details, refer to Note 11 - Other Gains and Charges):

Interest expenses increased $7.5 million due to higher interest rates on the 8.250% notes, slightly offset by lower long-term debt outstanding.

Income Taxes

The federal statutory tax rate was 21.0% for the thirteen and twenty-six week periods ended December 27, 2023 and December 28, 2022.

The change in the effective income tax rate in the thirteen and twenty-six week periods ended December 27, 2023 to the thirteen and twenty-six week periods ended December 28, 2022 is primarily due to a less favorable impact from the FICA tip tax credit against higher Income before income taxes.

Segment Results

Chili’s Segment

Thirteen Week Period Ended December 27, 2023 compared to December 28, 2022

Chili’s Total revenues increased by 5.5% primarily due to favorable comparable restaurant sales driven by menu price increases, partially offset by unfavorable menu item mix and lower traffic. Refer to “Revenues” section above for further details about Chili’s revenues changes.

The following is a summary of the changes in Chili’s operating costs and expenses:

As a percentage of Company sales:

• Chili’s Food and beverage costs were favorable 3.1%, due to 2.0% from increased menu pricing, 0.9% of favorable commodity costs driven primarily by lower poultry and produce costs, partially offset by higher beverage costs, and 0.2% of favorable menu item mix.
• Chili’s Restaurant labor was unfavorable 0.5%, due to 1.5% of higher hourly labor driven by increased wage rates and staffing levels, and 0.7% of increased manager salary, partially offset by 1.7% of sales leverage.
• Chili’s Restaurant expenses were unfavorable 1.3%, due to 2.5% of higher advertising, 0.5% of higher repairs and maintenance, 0.5% of higher other restaurant expenses, partially offset by 1.1% of sales leverage and 1.1% lower delivery fees and to-go supplies.

Chili’s Depreciation and amortization decreased $0.5 million as follows:

Chili’s General and administrative increased $1.7 million as follows:

Chili’s Other (gains) and charges consisted of the following (for further details, refer to Note 11 - Other Gains and Charges):

Twenty-Six Week Period Ended December 27, 2023 compared to December 28, 2022

Chili’s Total revenues increased 6.2% primarily due to favorable comparable restaurant sales driven by menu price increases and favorable menu item mix, partially offset by lower traffic. Refer to “Revenues” section above for further details about Chili’s revenues changes.

The following is a summary of the changes in Chili’s operating costs and expenses:

As a percentage of Company sales:

• Chili’s Food and beverage costs were favorable 4.1%, due to 2.4% from increased menu pricing, 0.9% of favorable commodity costs driven primarily by lower poultry costs, partially offset by higher beverage costs, and 0.8% of favorable menu item mix.
• Chili’s Restaurant labor was unfavorable 0.1%, due to 1.3% of higher hourly labor expenses driven by increased wage rates and staffing levels, 0.6% of increased manager salaries, and 0.1% of higher other labor expenses, partially offset by 1.9% of sales leverage.
• Chili’s Restaurant expenses were unfavorable 0.9%, due to 2.4% of higher advertising, 0.5% of higher repairs and maintenance expenses, and 0.3% of higher other restaurant expenses, partially offset by 1.2% of lower delivery fees and to-go supplies and 1.1% of sales leverage.

Chili’s Depreciation and amortization decreased $0.3 million as follows:

Chili’s General and administrative increased $2.2 million as follows:

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Chili’s Other (gains) and charges consisted of the following (for further details, refer to Note 11 - Other Gains and Charges):

Maggiano’s Segment

Thirteen Week Period Ended December 27, 2023 compared to December 28, 2022

Maggiano’s Total revenues increased 4.7% primarily due to favorable comparable restaurant sales driven by increased menu pricing, partially offset by lower traffic. Refer to “Revenues” section above for further details about Maggiano’s revenues changes.

The following is a summary of the changes in Maggiano’s operating costs and expenses:

As a percentage of Company sales:

• Maggiano’s Food and beverage costs were favorable 2.4%, due to 1.8% from increased menu pricing and 0.6% of favorable commodity costs driven primarily by lower poultry and seafood costs.
• Maggiano’s Restaurant labor was favorable 0.9%, due to 1.2% of sales leverage and 0.2% of lower other labor expenses, partially offset by 0.5% of higher hourly labor costs.
• Maggiano’s Restaurant expenses were unfavorable 0.3%, due to 0.5% of higher rent, 0.4% higher supervision, 0.4% of higher repairs and maintenance, and 0.3% of higher supplies, partially offset by 0.7% of sales leverage, 0.5% of lower delivery fees and to-go supplies, and 0.1% of lower other restaurant expenses.

Twenty-Six Week Period Ended December 27, 2023 compared to December 28, 2022

Maggiano’s Total revenues increased 2.2% primarily due to favorable comparable restaurant sales driven by increased menu pricing, partially offset by lower traffic. Refer to “Revenues” section above for further details about Maggiano’s revenues changes.

The following is a summary of the changes in Maggiano’s operating costs and expenses:

As a percentage of Company sales:

• Maggiano’s Food and beverage costs were favorable 2.5%, due to 1.7% from increased menu pricing and 0.8% of favorable commodity costs driven by lower poultry costs.
• Maggiano’s Restaurant labor was flat 0.0%, due to 0.6% of sales leverage, partially offset by 0.5% of higher hourly labor costs and 0.1% of higher other labor costs.
• Maggiano’s Restaurant expenses were unfavorable 0.4%, due to 0.5% of higher repairs and maintenance, 0.4% of higher supervision, and 0.4% of higher other restaurant expenses, partially offset by 0.5% of lower delivery fees and to-go supplies and 0.4% of sales leverage.

Liquidity and Capital Resources

Cash Flows

Cash Flows from Operating Activities

Net cash provided by operating activities increased due to an increase in operating income, the timing of accrued interest payments on our 8.25% notes and the timing of other operational receipts and payments, partially offset by increases in payments of performance-based compensation and income taxes in the current year.

Cash Flows from Investing Activities

Net cash used in investing activities decreased compared to the prior year. Decreased spend on Chili’s remodels and new restaurant construction were partially offset by increased Chili’s capital maintenance and spend on Maggiano’s remodels.

Cash Flows from Financing Activities

Net cash (used in) provided by financing activities increased primarily due to $25.0 million of net repayment activity in fiscal 2024 compared to $40.0 million of net borrowing activity in fiscal 2023 on the revolving credit facility and an increase in share repurchases in fiscal 2024 of $23.0 million.

Debt

Net repayments of $25.0 million were made during the twenty-six week period ended December 27, 2023 on the revolving credit facility. As of December 27, 2023, $763.7 million of credit was available under the revolving credit facility.

The $900.0 million revolving credit facility matures on August 18, 2026 and bears interest of SOFR plus an applicable margin of 1.50% to 2.25% and an undrawn commitment fee of 0.25% to 0.35%, both based on a function of our debt-to-cash-flow ratio. As of December 27, 2023, our interest rate was 7.21% consisting of SOFR of 5.36% plus the applicable margin and spread adjustment of 1.85%.

As of December 27, 2023, we were in compliance with our covenants pursuant to the $900.0 million revolving credit facility and under the terms of the indentures governing our 5.000% and 8.250% notes. We expect to remain in compliance with our covenants during the remainder of fiscal 2024.

We intend to refinance our 5.000% notes, which will mature in October 2024, through our existing revolving credit facility.

Refer to Note 6 - Debt for further information about our notes and revolving credit facility.

Share Repurchase Program

Our Board of Directors approved a $300.0 million share repurchase program during fiscal 2022. Our share repurchase program is used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. We evaluate potential share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, proceeds from divestitures, borrowings and planned investment and financing needs.

In the twenty-six week period ended December 27, 2023, we repurchased 0.8 million shares of our common stock for $25.1 million, including 0.7 million shares purchased for $21.0 million as part of our share repurchase program and 0.1 million shares purchased from team members to satisfy tax withholding obligations on the vesting of restricted shares. These withheld shares of common stock are not considered common stock repurchases under our authorized common stock repurchase plan. As of December 27, 2023, approximately $183.0 million of share repurchase authorization remains under the current share repurchase program.

Cash Flow Outlook

Cash flow from operations typically provides the company with a significant source of liquidity. Additionally, during fiscal 2023, we increased the capacity under our revolving credit facility by $100.0 million and issued new $350.0 million senior notes that mature in 2030.

Based on the current level of operations, we believe that our current cash and cash equivalents, coupled with cash generated from operations and availability under our existing revolving credit facility will be adequate to meet our capital expenditure and working capital needs for at least the next twelve months. We continue to monitor the macro environment and will adjust our overall approach to capital allocation, including share repurchases, as events and macroeconomic trends unfold.

Critical Accounting Estimates

The preparation of the financial statements in conformity with GAAP requires us to make estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities. Actual results could differ from these estimates. Our critical accounting estimates have not changed materially from those previously reported in our Annual Report on Form 10-K for the fiscal year ended June 28, 2023.

Recent Accounting Pronouncements

The impact of recent accounting pronouncements can be found at Note 1 - Basis of Presentation in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I, Item 1 of this Form 10-Q report.

Interest Rate Risk

The terms of our revolving credit facility require us to pay interest on outstanding borrowings at SOFR plus an applicable margin based on a function of our debt-to-cash flow ratio. As of December 27, 2023, $136.3 million was outstanding under the revolving credit facility. For purposes of illustration, a 10% increase in the current interest rate on the outstanding balance of this variable rate financial instrument as of December 27, 2023 would result in an additional $1.0 million of interest expense during fiscal 2024.

Commodity Price Risk

We purchase food and other commodities for use in our operations based on market prices established with our suppliers. While our purchasing commitments partially mitigate the risk of such fluctuations, there is no assurance that supply and demand factors such as disease, inclement weather or recent geopolitical unrest, will not cause the prices of the commodities used in our restaurant operations to fluctuate. Additionally, if there is a time lag between increasing commodity prices and our ability to increase menu prices or if we believe a commodity price increase to be short in duration and we choose not to pass on the cost increases, our short-term financial results could be negatively affected.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective.

INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting during the thirteen week period ended December 27, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

FORWARD-LOOKING STATEMENTS

Information and statements contained in this Form 10-Q, in our other filings with the SEC or in our written and verbal communications that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are generally accompanied by words like “believes,” “anticipates,” “estimates,” “predicts,” “expects,” “plans,” “intends,” “projects,” “continues” and other similar expressions that convey uncertainty about future events or outcomes. Forward-looking statements are based on our current plans and expectations and involve risks and uncertainties which could cause actual results to differ materially from our historical results or from those projected in forward-looking statements. These risks and uncertainties are, in many instances, beyond our control. We wish to caution you against placing undue reliance on forward-looking statements because of these risks and uncertainties. Except as required by law, we expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

The forward-looking statements contained in this Form 10-Q report are subject to the risks and uncertainties described in Part I, Item IA “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 28, 2023, and below in Part II, Item 1A “Risk Factors” in this report on Form 10-Q, as well as the risks and uncertainties that generally apply to all businesses. We further caution that it is not possible to identify all risks and uncertainties, and you should not consider the identified factors as a complete list of all risks and uncertainties. Among the factors that could cause actual results to differ materially are: the impact of general economic conditions, including inflation, on economic activity and on our operations; disruptions on our business including consumer demand, costs, product mix, our strategic initiatives, our partners’ supply chains, operations, technology and assets, and our financial performance; the impact of competition; changes in consumer preferences; consumer perception of food safety; reduced consumer discretionary spending; unfavorable publicity; governmental regulations; the Company's ability to meet its business strategy plan; loss of key management personnel; failure to hire and retain high-quality restaurant management and team members; increasing regulation surrounding wage inflation and competitive labor markets; the impact of social media or other unfavorable publicity; reliance on technology and third party delivery providers; failure to protect the security of data of our guests and team members; product availability and supply chain disruptions; regional business and economic conditions; volatility in consumer, commodity, transportation, labor, currency and capital markets; litigation; franchisee success; technology failures; failure to protect our intellectual property; outsourcing; impairment of goodwill or assets; failure to maintain effective internal control over financial reporting; downgrades in credit ratings; changes in estimates regarding our assets; actions of activist shareholders; failure to comply with new environmental, social and governance (“ESG”) requirements; failure to achieve any goals, targets or objectives with respect to ESG matters; adverse weather conditions; terrorist acts; health epidemics or pandemics; tax reform; inadequate insurance coverage and limitations imposed by our credit agreements

In addition to the other information in this Form 10-Q report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 28, 2023, which could materially affect our business, financial condition or results of operations. It is not possible to predict or identify all risk factors. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business, financial condition or results of operations. Therefore, the risks identified are not intended to be a complete discussion of all potential risks or uncertainties.

There have been no material changes in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 28, 2023.