Bloomin’ Brands(BLMN) - 2020 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION This section presents the company's unaudited financial statements, notes, and management's discussion and analysis Item 1. Financial Statements (Unaudited) Unaudited consolidated financial statements detail Bloomin' Brands' financial position, operations, cash flows, and COVID-19 impact Consolidated Balance Sheets Balance sheets show increased cash and total liabilities as of March 29, 2020, driven by revolving credit facility borrowings | Metric | March 29, 2020 (in thousands) | December 29, 2019 (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Cash and cash equivalents | $403,395 | $67,145 | | Total current assets | $572,446 | $340,468 | | Total assets | $3,766,601 | $3,592,683 | | Total current liabilities | $838,030 | $962,021 | | Long-term debt, net | $1,389,273 | $1,022,293 | | Total liabilities | $3,666,458 | $3,415,202 | | Total stockholders' equity | $100,143 | $177,481 | Consolidated Statements of Operations and Comprehensive (Loss) Income The company reported a net loss for Q1 2020, a significant decline from prior year net income, due to decreased revenues and increased expenses | Metric | Thirteen Weeks Ended March 29, 2020 (in thousands) | Thirteen Weeks Ended March 31, 2019 (in thousands) | | :-------------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Total revenues | $1,008,337 | $1,128,131 | | Total costs and expenses | $1,049,905 | $1,045,637 | | (Loss) income from operations | $(41,568) | $82,494 | | Net (loss) income attributable to Bloomin' Brands | $(34,611) | $64,300 | | Basic (loss) earnings per share | $(0.44) | $0.70 | | Diluted (loss) earnings per share | $(0.44) | $0.69 | - Provision for impaired assets and restaurant closings increased significantly to $41.3 million in Q1 2020 from $3.6 million in Q1 2019[14] Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased significantly from December 2019 to March 2020 due to net loss, other comprehensive losses, and cash dividends | Metric | December 29, 2019 (in thousands) | March 29, 2020 (in thousands) | | :--------------------------------- | :------------------------------- | :---------------------------- | | Total stockholders' equity | $177,481 | $100,143 | | Net (loss) income | N/A | $(34,414) | | Other comprehensive loss, net of tax | N/A | $(19,901) | | Cash dividends declared | N/A | $(17,480) | Condensed Consolidated Statements of Cash Flows Operating cash flow decreased, while financing cash flow substantially increased from credit facility borrowings, leading to a large cash increase | Metric | Thirteen Weeks Ended March 29, 2020 (in thousands) | Thirteen Weeks Ended March 31, 2019 (in thousands) | | :--------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net cash provided by operating activities | $28,291 | $83,883 | | Net cash used in investing activities | $(34,798) | $(42,020) | | Net cash provided by (used in) financing activities | $342,333 | $(31,379) | | Net increase in cash, cash equivalents and restricted cash | $336,250 | $10,943 | | Cash, cash equivalents and restricted cash as of the end of the period | $403,395 | $82,766 | - Proceeds from borrowings on revolving credit facilities, net, were $505.0 million in Q1 2020, significantly higher than $148.2 million in Q1 2019[22] Notes to Consolidated Financial Statements Detailed notes explain the company's business, COVID-19 impact, accounting policies, and performance across various financial areas 1. Description of the Business and Basis of Presentation Bloomin' Brands operates casual and fine dining restaurants, with Q1 2020 financials significantly impacted by the COVID-19 pandemic - Bloomin' Brands owns and operates four restaurant concepts: Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, and Fleming's Prime Steakhouse & Wine Bar[25] - The COVID-19 pandemic significantly impacted the company's business in Q1 2020, leading to temporary dining room closures and a shift to take-out and delivery services[27] - The company adopted ASU No. 2016-13 (credit losses) and ASU No. 2018-15 (cloud computing arrangements) on December 30, 2019, with the former resulting in a $4.3 million cumulative-effect debit adjustment to Accumulated deficit[29][30] 2. COVID-19 Impact The COVID-19 pandemic resulted in $65.1 million in charges for Q1 2020, including asset impairments, employee relief pay, and inventory obsolescence | CHARGES | CONSOLIDATED INCOME STATEMENT CLASSIFICATION | MARCH 29, 2020 (in thousands) | | :---------------------------------- | :------------------------------------------- | :---------------------------- | | Inventory obsolescence and spoilage | Cost of sales | $6,182 | | Compensation for idle employees | Labor and other related | $16,186 | | Lease guarantee contingent liabilities | General and administrative | $4,188 | | Allowance for expected credit losses | General and administrative | $3,334 | | Right-of-use asset impairment | Provision for impaired assets and restaurant closings | $20,484 | | Fixed asset impairment | Provision for impaired assets and restaurant closings | $11,728 | | Goodwill and other impairment | Provision for impaired assets and restaurant closings | $2,388 | | Total | | $65,063 | 3. Revenue Recognition Total revenues decreased by 10.6% year-over-year, primarily due to declining restaurant sales and franchise revenues, heavily impacted by COVID-19 | Revenue Category | Thirteen Weeks Ended March 29, 2020 (in thousands) | Thirteen Weeks Ended March 31, 2019 (in thousands) | | :----------------------- | :----------------------------------------------- | :----------------------------------------------- | | Restaurant sales | $996,237 | $1,111,642 | | Franchise and other revenues | $12,100 | $16,489 | | Total revenues | $1,008,337 | $1,128,131 | | Segment/Concept | Restaurant Sales (March 29, 2020) | Franchise Revenue (March 29, 2020) | Restaurant Sales (March 31, 2019) | Franchise Revenue (March 31, 2019) | | :------------------------------------ | :-------------------------------- | :--------------------------------- | :-------------------------------- | :--------------------------------- | | U.S. total | $884,889 | $7,138 | $1,000,813 | $10,982 | | International total | $111,348 | $2,411 | $110,829 | $2,780 | | Outback Steakhouse U.S. | $530,685 | $6,541 | $586,771 | $10,601 | | Outback Steakhouse Brazil | $91,590 | — | $89,565 | — | - Deferred gift card revenue decreased from $358.8 million at December 29, 2019, to $277.5 million at March 29, 2020[42] 4. Impairments, Exit Costs and Disposals Impairment losses and restaurant closure expenses surged to $41.3 million in Q1 2020, largely due to COVID-19 and transformational initiatives | Category | Thirteen Weeks Ended March 29, 2020 (in thousands) | Thirteen Weeks Ended March 31, 2019 (in thousands) | | :------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Total impairment losses | $40,424 | $3,482 | | Total restaurant closure expenses | $894 | $104 | | Provision for impaired assets and restaurant closings | $41,318 | $3,586 | - Asset impairment and closure charges related to COVID-19 totaled $31.3 million in the U.S. segment and $3.3 million in the international segment[46] - Asset impairment charges related to transformational initiatives amounted to $6.3 million[46] 5. (Loss) Earnings Per Share The company reported a basic and diluted loss per share of $(0.44) for Q1 2020, a significant decrease from prior year earnings | Metric | Thirteen Weeks Ended March 29, 2020 | Thirteen Weeks Ended March 31, 2019 | | :------------------------------------------ | :---------------------------------- | :---------------------------------- | | Net (loss) income attributable to common stockholders | $(38,107) | $64,300 | | Basic (loss) earnings per share | $(0.44) | $0.70 | | Diluted (loss) earnings per share | $(0.44) | $0.69 | | Basic weighted average common shares outstanding | 87,129 | 91,415 | | Diluted weighted average common shares outstanding | 87,129 | 92,661 | - The redemption of preferred stock in excess of carrying value resulted in a $3.5 million reduction to net income attributable to common stockholders in Q1 2020[51] 6. Stock-based Compensation Plans Stock-based compensation expense decreased to $3.2 million in Q1 2020, with grants of stock options, restricted stock units, and performance shares | Compensation Type | Thirteen Weeks Ended March 29, 2020 (in thousands) | Thirteen Weeks Ended March 31, 2019 (in thousands) | | :------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Stock options | $832 | $1,159 | | Restricted stock units | $1,683 | $1,749 | | Performance-based share units | $699 | $1,003 | | Total | $3,214 | $3,911 | - The weighted-average grant date fair value per option decreased from $5.76 in Q1 2019 to $3.12 in Q1 2020[56] | Award Type | Unrecognized Compensation Expense (in thousands) | Remaining Weighted-Average Vesting Period (in years) | | :---------------------------- | :--------------------------------------------- | :--------------------------------------------------- | | Stock options | $6,127 | 1.8 | | Restricted stock units | $16,967 | 2.2 | | Performance-based share units | $14,016 | 2.3 | 7. Other Current Assets, Net Other current assets, net, decreased significantly to $101.0 million, primarily due to a large reduction in accounts receivable from gift cards | Asset Category | March 29, 2020 (in thousands) | December 29, 2019 (in thousands) | | :------------------------------ | :---------------------------- | :------------------------------- | | Prepaid expenses | $27,716 | $20,218 | | Accounts receivable - gift cards, net | $9,851 | $104,591 | | Accounts receivable - vendors, net | $10,407 | $13,465 | | Deferred gift card sales commissions | $13,049 | $18,554 | | Total other current assets, net | $100,964 | $186,462 | - The decrease in accounts receivable - gift cards, net, was a major contributor to the overall decline in other current assets[58] 8. Goodwill and Intangible Assets, Net Goodwill decreased to $282.6 million due to a $2.0 million impairment charge for the Hong Kong reporting unit, triggered by COVID-19 | Category | December 29, 2019 (in thousands) | March 29, 2020 (in thousands) | | :-------------------- | :------------------------------- | :---------------------------- | | U.S. Goodwill | $170,657 | $170,657 | | International Goodwill | $117,782 | $111,971 | | Consolidated Goodwill | $288,439 | $282,628 | - A $2.0 million goodwill impairment was recorded for the Hong Kong reporting unit within the international segment due to the COVID-19 outbreak[61] 9. Other Assets, Net Other assets, net, decreased to $101.7 million, mainly due to a reduction in company-owned life insurance assets | Asset Category | March 29, 2020 (in thousands) | December 29, 2019 (in thousands) | | :------------------------------ | :---------------------------- | :------------------------------- | | Company-owned life insurance | $46,534 | $60,126 | | Deferred financing fees | $4,476 | $4,893 | | Liquor licenses | $24,224 | $24,289 | | Other assets | $26,500 | $27,802 | | Total other assets, net | $101,734 | $117,110 | 10. Long-term Debt, Net Total debt, net, increased to $1.4 billion, primarily from revolving credit facility borrowings, with an Amended Credit Agreement providing covenant relief | Debt Category | March 29, 2020 (in thousands) | December 29, 2019 (in thousands) | | :-------------------------------- | :---------------------------- | :------------------------------- | | Term loan A | $443,750 | $450,000 | | Revolving credit facility | $975,000 | $599,000 | | Total Senior Secured Credit Facility | $1,418,750 | $1,049,000 | | Total debt, net | $1,418,640 | $1,048,704 | | Long-term debt, net | $1,389,273 | $1,022,293 | - The Amended Credit Agreement waives the Total Net Leverage Ratio (TNLR) requirement for the remainder of fiscal year 2020 and sets new maximum TNLR thresholds for subsequent periods[66] - New restrictions include a minimum monthly liquidity threshold of $125.0 million and a cap of $100.0 million on aggregate capital expenditures through March 28, 2021[67][68] 11. Other Long-term Liabilities, Net Other long-term liabilities, net, increased to $148.6 million, mainly due to additional interest rate swap and contingent lease liabilities | Liability Category | March 29, 2020 (in thousands) | December 29, 2019 (in thousands) | | :-------------------------------------------------- | :---------------------------- | :------------------------------- | | Accrued insurance liability | $33,490 | $33,818 | | Chef and Restaurant Managing Partner deferred compensation obligations and deposits | $41,824 | $47,831 | | Other long-term liabilities | $73,318 | $56,411 | | Total other long-term liabilities, net | $148,632 | $138,060 | - The increase in other long-term liabilities was primarily driven by $9.9 million in additional interest rate swap liabilities and $8.7 million in additional contingent lease liabilities[74] 12. Stockholders' Equity No share repurchases occurred in Q1 2020, a cash dividend was paid, and Accumulated Other Comprehensive Loss increased due to foreign currency and derivatives - No share repurchases were made during the thirteen weeks ended March 29, 2020, and repurchases are restricted until after September 26, 2021, under the Amended Credit Agreement[75] - A quarterly cash dividend of $0.20 per share, totaling $17.5 million, was declared and paid in Q1 2020[76] | AOCL Component | March 29, 2020 (in thousands) | December 29, 2019 (in thousands) | | :--------------------------------------- | :---------------------------- | :------------------------------- | | Foreign currency translation adjustment | $(159,328) | $(152,031) | | Unrealized loss on derivatives, net of tax | $(29,685) | $(17,745) | | Accumulated other comprehensive loss | $(189,013) | $(169,776) | 13. Derivative Instruments and Hedging Activities The company uses interest rate swaps to hedge variable rate debt, which were in a net liability position and subsequently re-designated in May 2020 - The company has variable-to-fixed interest rate swap agreements with an aggregate notional amount of $550.0 million, maturing on November 30, 2022, paying a weighted-average fixed rate of 3.04%[81] | Derivative Type | March 29, 2020 (in thousands) | December 29, 2019 (in thousands) | | :--------------------------------------- | :---------------------------- | :------------------------------- | | Interest rate swaps - current liability | $13,335 | $7,174 | | Interest rate swaps - non-current liability | $26,758 | $16,835 | | Total fair value of derivative instruments - liabilities | $40,093 | $24,009 | - The company de-designated and re-designated its interest rate swap hedge relationships in May 2020 to align with the Amended Credit Agreement, with no impact on consolidated financial statements from the hedge activity[83][85] 14. Leases Operating lease right-of-use assets and total lease liabilities remained substantial, with significant cash paid for operating lease liabilities | Lease Metric | March 29, 2020 (in thousands) | December 29, 2019 (in thousands) | | :-------------------------------- | :---------------------------- | :------------------------------- | | Operating lease right-of-use assets | $1,249,750 | $1,266,548 | | Total lease assets, net | $1,251,826 | $1,268,584 | | Current operating lease liabilities | $185,278 | $171,866 | | Non-current operating lease liabilities | $1,281,372 | $1,279,051 | | Total lease liabilities | $1,468,978 | $1,453,225 | | Lease Expense Category | Thirteen Weeks Ended March 29, 2020 (in thousands) | Thirteen Weeks Ended March 31, 2019 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Operating leases | $45,882 | $45,233 | | Variable lease cost | $1,120 | $819 | | Sublease revenue | $(1,677) | $(1,314) | | Lease costs, net | $45,713 | $45,135 | - Cash paid for amounts included in the measurement of operating lease liabilities was $48.5 million for the thirteen weeks ended March 29, 2020[93] 15. Fair Value Measurements The company measures financial instruments and impaired assets at fair value, primarily using Level 3 unobservable inputs for nonrecurring measurements | Financial Instrument | March 29, 2020 (in thousands) | December 29, 2019 (in thousands) | | :--------------------------------------- | :---------------------------- | :------------------------------- | | Total asset recurring fair value measurements | $9,370 | $13,789 | | Total liability recurring fair value measurements | $40,093 | $24,009 | | Asset Category (Nonrecurring) | March 29, 2020 Carrying Value (in thousands) | March 29, 2020 Total Impairment (in thousands) | | :------------------------------------ | :------------------------------------------- | :--------------------------------------------- | | Assets held for sale | $1,182 | $75 | | Operating lease right-of-use assets | $55,644 | $19,563 | | Property, fixtures and equipment | $21,693 | $18,398 | | Goodwill and other assets | $1,044 | $2,388 | | Total | $79,563 | $40,424 | - The majority of inputs used to value long-lived assets held and used are unobservable (Level 3), including weighted-average cost of capital (10.4%) and long-term growth rate (1.5% to 2.0%)[102][103][104] 16. Allowance for Expected Credit Losses Allowance for trade receivable expected credit losses increased to $4.6 million, driven by ASU adoption and a provision for franchise receivables due to COVID-19 | Metric | Thirteen Weeks Ended March 29, 2020 (in thousands) | | :------------------------------------------ | :----------------------------------------------- | | Allowance for credit losses, beginning of period | $199 | | Adjustment for adoption of ASU No. 2016-13 | $1,018 | | Provision for expected credit losses | $3,334 | | Allowance for credit losses, end of period | $4,551 | - The company fully reserved substantially all outstanding franchise receivables in March 2020 due to the economic impact of the COVID-19 pandemic[110] 17. Income Taxes The effective income tax rate increased significantly to 36.4% in Q1 2020, primarily due to the CARES Act's NOL carryback benefit | Metric | Thirteen Weeks Ended March 29, 2020 | Thirteen Weeks Ended March 31, 2019 | | :-------------------------------------------------- | :---------------------------------- | :---------------------------------- | | (Loss) income before (benefit) provision for income taxes | $(54,069) | $71,145 | | (Benefit) provision for income taxes | $(19,655) | $5,496 | | Effective income tax rate | 36.4% | 7.7% | - The increase in the effective tax rate was primarily driven by the benefit of the five-year carryback of the forecasted 2020 NOL under the CARES Act[115] - The company expects to increase its general business credit carryforwards by approximately $50 million to $80 million in 2020 due to the NOL carryback and CARES Act provisions[116] 18. Commitments and Contingencies The company faces legal proceedings and is contingently liable for $31.3 million in assigned real estate leases, with additional COVID-19 related liabilities - Liabilities for legal matters were $3.3 million as of March 29, 2020[118] - The company is contingently liable for approximately $31.3 million in undiscounted payments for assigned real estate leases[120] - An additional $4.2 million contingent lease liability was recorded in March 2020 due to the COVID-19 pandemic, bringing the total recorded contingent lease liability to $9.7 million[124] 19. Segment Reporting Total revenues decreased by 10.6%, with the U.S. segment experiencing a significant decline in income from operations due to COVID-19 and inflation - The company's reportable segments are U.S. (Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, Fleming's Prime Steakhouse & Wine Bar) and International (Outback Steakhouse, Abbraccio in Brazil, Hong Kong/China)[125] | Segment | Thirteen Weeks Ended March 29, 2020 (in thousands) | Thirteen Weeks Ended March 31, 2019 (in thousands) | | :-------------- | :----------------------------------------------- | :----------------------------------------------- | | U.S. Total revenues | $894,497 | $1,014,507 | | International Total revenues | $113,840 | $113,624 | | Total revenues | $1,008,337 | $1,128,131 | | Segment | Thirteen Weeks Ended March 29, 2020 (in thousands) | Thirteen Weeks Ended March 31, 2019 (in thousands) | | :-------------- | :----------------------------------------------- | :----------------------------------------------- | | U.S. Segment income from operations | $11,379 | $113,035 | | International Segment income from operations | $6,787 | $13,720 | | Total segment income from operations | $18,166 | $126,755 | 20. Subsequent Events Post-quarter, the company completed a $230.0 million convertible senior notes offering and entered into hedge and warrant transactions to manage dilution - On May 8, 2020, the company completed a $200.0 million private offering of 5.00% convertible senior notes due 2025, with an additional $30.0 million issued on May 12, 2020, totaling $230.0 million[131] - Net proceeds from the convertible notes offering were approximately $221.4 million, intended for general corporate purposes[137] - The company entered into Convertible Note Hedge Transactions and Warrant Transactions to reduce potential equity dilution and offset cash payments upon conversion of the notes, with a net cost of approximately $19.6 million[140][141][142] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2020 financial performance, condition, and liquidity, highlighting COVID-19's adverse impact, key indicators, and strategic adjustments Cautionary Statement The cautionary statement emphasizes risks and uncertainties in forward-looking statements, particularly concerning COVID-19's material adverse effects on the business - Forward-looking statements involve risks and uncertainties related to events and circumstances that may or may not occur in the future[148] - The COVID-19 pandemic is a significant factor that could cause actual results to differ materially from forward-looking statements, impacting business, financial condition, and liquidity[148] - The company's Q1 2020 Form 10-Q filing was delayed due to complexities in forecasting and accounting for goodwill and other assets, and management's focus on the Amended Credit Agreement and 2025 Notes offering, all stemming from the COVID-19 pandemic[152][154] Overview Bloomin' Brands is a global casual dining company operating 1,172 owned and 300 franchised restaurants across four distinct concepts - Bloomin' Brands operates 1,172 owned and 300 franchised restaurants globally as of March 29, 2020[157] - The company's portfolio includes Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, and Fleming's Prime Steakhouse & Wine Bar[157] Executive Summary Q1 2020 saw a 10.6% revenue decrease and a shift to operating loss, driven by lower sales, COVID-19 costs, restructuring, and inflation - Total revenues decreased by 10.6% in Q1 2020 compared to Q1 2019[158] - The company reported a loss from operations of $41.6 million in Q1 2020, down from an income of $82.5 million in Q1 2019[159] - Key drivers for the decline include lower comparable restaurant sales, COVID-19 related costs (asset impairment, relief pay, inventory obsolescence), restructuring initiatives, and commodity/labor inflation[159] Recent Developments - COVID-19 The company limited U.S. services to carry-out/delivery in March 2020, leading to reduced traffic, expense management, and withdrawal of financial guidance - U.S. restaurant dining rooms were temporarily limited to carry-out and delivery only, effective March 20, 2020, due to the COVID-19 pandemic[160] - The company has reopened a significant portion of dining rooms but anticipates continued adverse impacts on results due to uncertain customer traffic and potential governmental restrictions on capacity[161] - Financial guidance for 2020 has been withdrawn, and the company is actively managing expenses and securing liquidity[161][162] Strategic Alternatives Review Update The strategic alternatives review, including a potential Brazil business sale, has been suspended to prioritize the COVID-19 pandemic response - The strategic review process, initiated in November 2019, has been suspended to prioritize the COVID-19 pandemic response[163] - Discussions regarding a sale of the Brazil business have also been suspended[163] Key Performance Indicators Performance is evaluated using average restaurant unit volumes, comparable sales, system-wide sales, restaurant-level operating margin, and adjusted non-GAAP measures - Key performance indicators include average restaurant unit volumes, comparable restaurant sales, system-wide sales, restaurant-level operating margin, Income from operations, Net income, Diluted earnings per share, and customer satisfaction scores[165] - Restaurant-level operating margin is a non-GAAP measure used to evaluate restaurant-level operating efficiency, excluding franchise and other revenues, depreciation and amortization, general and administrative expenses, and asset impairment/closing costs[166] - Adjusted non-GAAP financial measures (e.g., Adjusted restaurant-level operating margin, Adjusted income from operations) are used to isolate the effects of certain items not correlated to core operating performance[167][168] Selected Operating Data As of March 29, 2020, the company operated 1,213 U.S. and 259 international restaurants, totaling 1,472 system-wide, with minor changes | Segment | March 29, 2020 | March 31, 2019 | | :------------------------------------ | :------------- | :------------- | | U.S. total | 1,213 | 1,226 | | International total | 259 | 255 | | System-wide total | 1,472 | 1,481 | | U.S. Company-owned Outback Steakhouse | 575 | 579 | | International Company-owned Outback Steakhouse - Brazil | 103 | 95 | Results of Operations Overall profitability declined significantly due to 10.6% lower revenues, increased costs as a percentage of sales, and substantial impairment charges from COVID-19 | Metric | Thirteen Weeks Ended March 29, 2020 | Thirteen Weeks Ended March 31, 2019 | | :------------------------------------------ | :---------------------------------- | :---------------------------------- | | Total revenues | 100.0% | 100.0% | | Cost of sales (% of Restaurant sales) | 32.1% | 31.7% | | Labor and other related (% of Restaurant sales) | 31.0% | 28.7% | | Other restaurant operating (% of Restaurant sales) | 24.7% | 22.6% | | (Loss) income from operations (% of Total revenues) | (4.1)% | 7.3% | RESTAURANT SALES Restaurant sales decreased by $115.4 million in Q1 2020, primarily due to lower comparable sales, refranchising, and negative foreign currency translation | Change Factor | Impact (in millions) | | :------------------------------------------ | :------------------- | | Comparable restaurant sales | $(99.3) | | Divestiture of restaurants through refranchising transactions | $(11.2) | | Effect of foreign currency translation | $(10.4) | | Restaurant closures | $(6.6) | | Restaurant openings | $12.1 | | Total change from March 31, 2019 to March 29, 2020 | $(115.4) | - The decrease in Restaurant sales was primarily driven by lower U.S. comparable restaurant sales and the impact of COVID-19[175] Comparable Restaurant Sales, Traffic and Average Check Per Person Increases (Decreases) U.S. comparable restaurant sales declined by 10.4% in Q1 2020 across all concepts due to COVID-19, while Brazil saw a 6.8% increase | Metric | Thirteen Weeks Ended March 29, 2020 | Thirteen Weeks Ended March 31, 2019 | | :------------------------------------------ | :---------------------------------- | :---------------------------------- | | Combined U.S. Comparable restaurant sales | (10.4)% | 2.4% | | Outback Steakhouse - Brazil Comparable restaurant sales | 6.8% | 3.7% | | Combined U.S. Traffic | (10.4)% | (0.9)% | | Combined U.S. Average check per person | —% | 3.3% | - U.S. Outback Steakhouse comparable sales decreased by 9.5%, Carrabba's Italian Grill by 8.7%, Bonefish Grill by 13.9%, and Fleming's by 13.2%[176] - Outback Steakhouse Brazil results for Q1 2020 (through February 29, 2020) did not include any material impact from the COVID-19 pandemic[176] Average Restaurant Unit Volumes and Operating Weeks Average weekly restaurant unit volumes decreased across all U.S. concepts and Outback Steakhouse Brazil in Q1 2020, reflecting reduced sales | Concept | Thirteen Weeks Ended March 29, 2020 (weekly) | Thirteen Weeks Ended March 31, 2019 (weekly) | | :------------------------------------ | :------------------------------------------- | :------------------------------------------- | | U.S. Outback Steakhouse | $70,071 | $77,198 | | U.S. Carrabba's Italian Grill | $55,383 | $59,940 | | U.S. Bonefish Grill | $54,685 | $63,654 | | U.S. Fleming's Prime Steakhouse & Wine Bar | $80,649 | $91,238 | | International Outback Steakhouse - Brazil | $70,300 | $74,878 | Franchise and other revenues Franchise and other revenues decreased to $12.1 million in Q1 2020 from $16.5 million in Q1 2019, primarily due to a decline in franchise revenues | Revenue Type | Thirteen Weeks Ended March 29, 2020 (in millions) | Thirteen Weeks Ended March 31, 2019 (in millions) | | :--------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Franchise revenues | $9.5 | $13.8 | | Other revenues | $2.6 | $2.7 | | Franchise and other revenues | $12.1 | $16.5 | COSTS AND EXPENSES Costs and expenses increased significantly as a percentage of Restaurant sales across all categories in Q1 2020, primarily due to COVID-19 impacts, inflation, and substantial asset impairment charges Cost of sales Cost of sales increased by 0.4% as a percentage of Restaurant sales in Q1 2020, primarily due to 0.6% from inventory obsolescence and spoilage related to COVID-19 and 0.3% from commodity cost inflation | Metric | Thirteen Weeks Ended March 29, 2020 | Thirteen Weeks Ended March 31, 2019 | Change | | :-------------------- | :---------------------------------- | :---------------------------------- | :----- | | Cost of sales (in millions) | $319.7 | $352.1 | $(32.4) | | % of Restaurant sales | 32.1% | 31.7% | 0.4% | - Inventory obsolescence and spoilage costs associated with COVID-19 contributed 0.6% to the increase in cost of sales as a percentage of Restaurant sales[179] Labor and other related expenses Labor and other related expenses increased by 2.3% as a percentage of Restaurant sales in Q1 2020, mainly due to 1.6% from relief pay for idle employees impacted by COVID-19 dining room closures, 0.5% from decreased restaurant sales, and 0.3% from wage rate increases | Metric | Thirteen Weeks Ended March 29, 2020 | Thirteen Weeks Ended March 31, 2019 | Change | | :-------------------- | :---------------------------------- | :---------------------------------- | :----- | | Labor and other related (in millions) | $309.3 | $319.0 | $(9.7) | | % of Restaurant sales | 31.0% | 28.7% | 2.3% | - Relief pay for hourly employees due to COVID-19 dining room closures accounted for 1.6% of the increase in labor costs as a percentage of sales[181] Other restaurant operating expenses Other restaurant operating expenses increased by 2.1% as a percentage of Restaurant sales in Q1 2020, primarily due to the shift to an off-premise operational model (1.1% from additional operating expenses, 0.9% from decreased sales), increased gift card fees, and operating expense inflation | Metric | Thirteen Weeks Ended March 29, 2020 | Thirteen Weeks Ended March 31, 2019 | Change | | :-------------------- | :---------------------------------- | :---------------------------------- | :----- | | Other restaurant operating (in millions) | $246.6 | $250.9 | $(4.3) | | % of Restaurant sales | 24.7% | 22.6% | 2.1% | - The shift to an off-premise only operational model in March 2020 contributed 1.1% from additional operating expenses and 0.9% from decreased restaurant sales to the increase in other restaurant operating expenses as a percentage of sales[182] General and administrative General and administrative expenses increased to $84.8 million in Q1 2020 from $70.6 million in Q1 2019, driven by higher expected credit losses and contingent lease liabilities ($7.5 million), transformational costs ($5.4 million), and severance ($4.8 million) | Change Factor | Impact (in millions) | | :------------------------------------------ | :------------------- | | Expected credit losses and contingent lease liabilities | $7.5 | | Transformational costs | $5.4 | | Severance | $4.8 | | Total General and administrative (March 29, 2020) | $84.8 | | Total General and administrative (March 31, 2019) | $70.6 | Provision for impaired assets and restaurant closings Provision for impaired assets and restaurant closings surged to $41.3 million in Q1 2020, a $37.7 million increase from Q1 2019, primarily due to COVID-19 related asset impairment and transformational initiatives | Metric | Thirteen Weeks Ended March 29, 2020 (in millions) | Thirteen Weeks Ended March 31, 2019 (in millions) | Change (in millions) | | :-------------------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :------------------- | | Provision for impaired assets and restaurant closings | $41.3 | $3.6 | $37.7 | - COVID-19 related asset impairment and closure charges totaled $31.3 million in the U.S. segment and $3.3 million in the international segment[184] - Asset impairment charges related to transformational initiatives amounted to $6.3 million[184] (Loss) income from operations The company reported an operating loss of $(41.6) million in Q1 2020, a significant decline due to lower sales, COVID-19 costs, and inflation | Metric | Thirteen Weeks Ended March 29, 2020 (in millions) | Thirteen Weeks Ended March 31, 2019 (in millions) | Change (in millions) | | :------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | :------------------- | | (Loss) income from operations | $(41.6) | $82.5 | $(124.1) | | % of Total revenues | (4.1)% | 7.3% | (11.4)% | - The shift to an operating loss was driven by lower comparable restaurant sales, COVID-19 related costs (asset impairment, relief pay, inventory obsolescence), restructuring initiatives, and commodity/labor inflation[186] Interest expense, net Net interest expense increased slightly to $11.7 million in Q1 2020 from $11.2 million in Q1 2019, primarily due to higher interest expense from derivative instruments, partially offset by lower interest rates | Metric | Thirteen Weeks Ended March 29, 2020 (in millions) | Thirteen Weeks Ended March 31, 2019 (in millions) | Change (in millions) | | :-------------------- | :---------------------------------------------- | :---------------------------------------------- | :------------------- | | Interest expense, net | $11.7 | $11.2 | $0.5 | - The increase was primarily due to higher interest expense from derivative instruments, partially offset by lower interest rates[187] (Benefit) provision for income taxes The effective income tax rate increased significantly to 36.4% in Q1 2020, primarily due to the CARES Act's five-year NOL carryback benefit | Metric | Thirteen Weeks Ended March 29, 2020 | Thirteen Weeks Ended March 31, 2019 | Change | | :-------------------------- | :---------------------------------- | :---------------------------------- | :----- | | Effective income tax rate | 36.4% | 7.7% | 28.7% | - The increase in the effective tax rate was primarily due to the benefit of the five-year carryback of the forecasted 2020 NOL under the CARES Act[188] SEGMENT PERFORMANCE The U.S. segment experienced a substantial decline in total revenues and income from operations, primarily due to lower comparable restaurant sales and COVID-19 related costs. The International segment saw a slight increase in total revenues but a decrease in income from operations due to COVID-19 impacts in Hong Kong and other charges, despite higher comparable sales in Brazil U.S. Segment The U.S. segment's total revenues decreased to $894.5 million in Q1 2020 from $1,014.5 million in Q1 2019, leading to a significant drop in income from operations to $11.4 million from $113.0 million, primarily due to lower comparable restaurant sales, COVID-19 related costs, and labor/commodity inflation | Metric | Thirteen Weeks Ended March 29, 2020 (in thousands) | Thirteen Weeks Ended March 31, 2019 (in thousands) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Restaurant sales | $884,889 | $1,000,813 | | Total revenues | $894,497 | $1,014,507 | | Restaurant-level operating margin | 11.5% | 16.7% | | Income from operations | $11,379 | $113,035 | Restaurant sales U.S. Restaurant sales decreased by $115.9 million to $884.9 million in Q1 2020, primarily due to a $102.7 million decline from lower comparable restaurant sales, refranchising, and restaurant closures, partially offset by new openings | Change Factor | Impact (in millions) | | :------------------------------------------ | :------------------- | | Comparable restaurant sales | $(102.7) | | Divestiture of restaurants through refranchising transactions | $(11.2) | | Restaurant closures | $(5.7) |\ | Restaurant openings | $3.7 | | Total U.S. Restaurant sales (March 29, 2020) | $884.9 | Income from operations U.S. income from operations decreased significantly due to lower comparable restaurant sales, COVID-19 related costs (asset impairment, relief pay, inventory obsolescence, incremental operating costs), and labor/commodity inflation - The decrease in U.S. income from operations was primarily due to lower comparable restaurant sales, COVID-19 related costs (asset impairment charges, relief pay, inventory obsolescence, incremental operating costs), and labor and commodity inflation[197] International Segment The International segment's total revenues slightly increased to $113.8 million in Q1 2020, but income from operations decreased to $6.8 million from $13.7 million, primarily due to COVID-19 related costs and lower comparable sales in Hong Kong, despite higher comparable sales and lower advertising in Brazil | Metric | Thirteen Weeks Ended March 29, 2020 (in thousands) | Thirteen Weeks Ended March 31, 2019 (in thousands) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Restaurant sales | $111,348 | $110,829 | | Total revenues | $113,840 | $113,624 | | Restaurant-level operating margin | 18.5% | 22.3% | | Income from operations | $6,787 | $13,720 | Restaurant sales International Restaurant sales slightly increased to $111.3 million in Q1 2020, driven by $8.4 million from new restaurant openings and $3.4 million from higher comparable restaurant sales, partially offset by a $10.4 million negative effect of foreign currency translation | Change Factor | Impact (in millions) | | :------------------------------------------ | :------------------- | | Restaurant openings | $8.4 | | Comparable restaurant sales | $3.4 | | Effect of foreign currency translation | $(10.4) | | Restaurant closures | $(0.9) | | Total International Restaurant sales (March 29, 2020) | $111.3 | Income from operations International income from operations decreased due to COVID-19 related costs, lower comparable restaurant sales in Hong Kong, changes in product mix in Brazil, and commodity inflation - The decrease in international income from operations was primarily due to COVID-19 related costs, lower comparable restaurant sales in Hong Kong, changes in product mix in Brazil, and commodity inflation[203] - These decreases were partially offset by higher comparable restaurant sales and lower advertising expense in Brazil[203] Non-GAAP Financial Measures Non-GAAP measures like System-Wide Sales and Adjusted operating margins provide a clearer view of core performance by excluding variable or non-recurring items System-Wide Sales System-wide sales, a non-GAAP measure, includes sales from both company-owned and franchised restaurants. Total franchise sales decreased to $206 million in Q1 2020 from $229 million in Q1 2019, with declines in both U.S. and International segments - System-wide sales include sales from all company-owned and franchised restaurants, used by management to evaluate brand health and development[204] | Segment | Thirteen Weeks Ended March 29, 2020 (in millions) | Thirteen Weeks Ended March 31, 2019 (in millions) | | :--------------------------- | :---------------------------------------------- | :---------------------------------------------- | | U.S. Total franchise sales | $130 | $145 | | International Total franchise sales | $76 | $84 | | Total franchise sales | $206 | $229 | Adjusted restaurant-level operating margin Adjusted restaurant-level operating margin for the U.S. segment was 12.5% in Q1 2020, down from 17.1% in Q1 2019. This adjustment primarily accounts for restaurant and asset impairments, closing costs, and COVID-19 related costs | Metric | Thirteen Weeks Ended March 29, 2020 (Adjusted) | Thirteen Weeks Ended March 31, 2019 (Adjusted) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | | Restaurant-level operating margin | 12.5% | 17.1% | - Adjustments include unfavorable impacts from restaurant and asset impairments and closing costs ($2.8 million) and COVID-19 related costs ($(6.2) million) in Q1 2020[209] Adjusted income from operations, Adjusted net income and Adjusted diluted earnings per share Adjusted income from operations was $27.5 million in Q1 2020, down from $88.5 million in Q1 2019, with adjusted diluted EPS of $0.14 compared to $0.75. Adjustments primarily include $48.9 million in COVID-19 related costs and $22.2 million in severance and transformational costs | Metric | Thirteen Weeks Ended March 29, 2020 | Thirteen Weeks Ended March 31, 2019 | | :------------------------------------------ | :---------------------------------- | :---------------------------------- | | (Loss) income from operations | $(41,568) | $82,494 | | COVID-19 related costs adjustments | $48,876 | — | | Severance and other transformational costs adjustments | $22,232 | $2,855 | | Adjusted income from operations | $27,513 | $88,512 | | Adjusted net income | $12,475 | $69,499 | | Adjusted diluted earnings per share | $0.14 | $0.75 | - COVID-19 related costs, including asset impairments, inventory obsolescence, and credit losses, were a major adjustment in Q1 2020[212] Liquidity and Capital Resources The company aggressively preserved liquidity by suspending dividends/repurchases, reducing capital expenditures, and drawing on credit facilities in response to COVID-19 LIQUIDITY In response to COVID-19, the company suspended dividends and repurchases, reduced expenditures, negotiated rent, and drew down its revolving credit facility - The company suspended quarterly cash dividends and stock repurchases[215] - Marketing and capital expenditures were significantly reduced, and rent abatements/deferrals were pursued[215] - Substantially all remaining availability under the revolving credit facility was drawn down on March 16, 2020, to increase cash position[216] Cash and Cash Equivalents Cash and cash equivalents totaled $403.4 million as of March 29, 2020, with $32.2 million held by foreign affiliates, generally unrestricted - Cash and cash equivalents were $403.4 million as of March 29, 2020[218] - $32.2 million of cash was held by foreign affiliates, with no known restrictions on repatriation[218] Closure Initiatives Future undiscounted cash expenditures for lease liabilities related to closure initiatives are estimated between $11.9 million and $14.5 million through January 2029 - Future undiscounted cash expenditures for lease liabilities related to closure initiatives are estimated between $11.9 million and $14.5 million[220] Capital Expenditures Estimated capital expenditures for 2020 are $100.0 million to $110.0 million, with a $100.0 million limit imposed by the Amended Credit Agreement - Estimated capital expenditures for 2020 are $100.0 million to $110.0 million[221] - The Amended Credit Agreement limits aggregate capital expenditures to $100.0 million for the four fiscal quarters through March 28, 2021[223] Credit Facilities Outstanding borrowings under the Senior Secured Credit Facility totaled $1.4 billion as of March 29, 2020, with $4.8 million in available unused borrowing capacity under the revolving credit facility | Credit Facility | Balance as of March 29, 2020 (in thousands) | Balance as of December 29, 2019 (in thousands) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------- | | Term Loan A | $443,750 | $450,000 | | Revolving Credit Facility | $975,000 | $599,000 | | Total Credit Facilities | $1,418,750 | $1,049,000 | - As of March 29, 2020, the company had $4.8 million in available unused borrowing capacity under its **revolving credit f