QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.October 23, 2020: 45,289,445 shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRINKER INTERNATIONAL, INC.
BRINKER INTERNATIONAL, INC.
BRINKER INTERNATIONAL, INC.
BRINKER INTERNATIONAL, INC.
1. BASIS OF PRESENTATION
The preparation of the consolidated financial statements is in conformity with generally accepted accounting principles in the United States (“GAAP”) and requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and costs and expenses duringin the reporting periods. Actual results could differ from those estimates.
Our deferred development and franchise fees consist of the unrecognized fees received from franchisees. Recognition of these fees in subsequent periods is based on satisfaction of the contractual performance obligations of the active contracts with franchisees. We also expect to earn subsequent period royalties and advertising fees related to our franchise contracts; however, due to the variability and uncertainty of these future revenues based upon a sales-based measure, these future revenues are not yet determinableestimable due to the unsatisfied performance obligations based upon a sales-based measure.obligations.
6.4. OTHER GAINS AND CHARGES
Other (gains) and charges in the Consolidated Statements of Comprehensive Income (Unaudited) consistedconsist of the following:
|
| | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | Thirty-Nine Week Periods Ended |
| March 25, 2020 | | March 27, 2019 | | March 25, 2020 | | March 27, 2019 |
COVID-19 related charges | $ | 16.1 |
| | $ | — |
| | $ | 16.1 |
| | $ | — |
|
Foreign currency transaction (gain) loss | 2.3 |
| | (0.5 | ) | | 2.2 |
| | (0.6 | ) |
Acquisition of franchise restaurants costs, net of (gains) | 1.1 |
| | — |
| | 2.6 |
| | — |
|
Remodel-related costs | 0.6 |
| | 1.7 |
| | 2.1 |
| | 4.8 |
|
Restaurant closure charges | 0.3 |
| | 0.2 |
| | 3.4 |
| | 4.0 |
|
Corporate headquarters relocation charges | 0.2 |
| | 5.2 |
| | 0.9 |
| | 6.2 |
|
Loss (gain) on sale of assets, net | 0.1 |
| | (6.0 | ) | | — |
| | (6.8 | ) |
Restaurant impairment charges | — |
| | — |
| | 4.6 |
| | 1.0 |
|
Lease modification net (gain) | — |
| | — |
| | (3.1 | ) | | — |
|
Sale leaseback (gain), net of transaction charges | — |
| | (4.3 | ) | | — |
| | (22.0 | ) |
Other | (1.4 | ) | | 0.2 |
| | 1.9 |
| | 1.0 |
|
| $ | 19.3 |
| | $ | (3.5 | ) | | $ | 30.7 |
| | $ | (12.4 | ) |
| | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | |
| September 23, 2020 | | September 25, 2019 | | | | |
Restaurant closure charges | $ | 1.5 | | | $ | 0.2 | | | | | |
COVID-19 related charges | 1.2 | | | 0 | | | | | |
Remodel-related costs | 0.2 | | | 0.7 | | | | | |
Lease modification gain, net | (0.5) | | | (3.1) | | | | | |
| | | | | | | |
Other | 1.4 | | | 1.3 | | | | | |
| $ | 3.8 | | | $ | (0.9) | | | | | |
Fiscal 20202021
•Restaurant closure charges primarily relates to closure costs associated with certain Chili’s restaurants closed in the first quarter of fiscal 2021.
•COVID-19 related charges during the thirteen and thirty-nine week periods ended March 25, 2020 were incurred from the initial impact and our efforts to address the COVID-19 pandemic beginning in the third quarterconsists of fiscal 2020, refer to Note 2 - Novel Coronavirus Pandemic for further details.
Foreign currency transaction (gain) loss resulting from the change in value of the Mexican peso as compared to that of the U.S. dollar on our Mexican peso denominated note receivable that we received as consideration from the sale of our equity interest in our Mexico joint venture in the second quarter of fiscal 2018.
Acquisition of franchise restaurants costs net of (gains) during the thirteen and thirty-nine week periods ended March 25, 2020 primarily related to the 116 restaurants acquired from a franchisee, referboth Chili’s and Maggiano’s employee assistance and related payroll taxes for certain team members, and restaurant supplies such as face masks and hand sanitizers required to Note 3 - Chili’s Restaurant Acquisition for further details.continue to reopen dining rooms.
•Remodel-related costs during the thirteen and thirty-nine week periods ended March 25, 2020 were recorded relatedrelates to existing fixed asset write-offs associated with the ongoing Chili’s remodel project.initiative.
Restaurant closure charges during•Lease modification gain, net relates to the thirteen and thirty-nine week periods ended March 25,lease terminations of certain Chili’s operating lease liabilities.
Fiscal 2020 primarily related to leases on certain closed Chili’s restaurant locations.
Corporate headquarters relocation charges during the thirteen and thirty-nine week periods ended March 25, 2020 related to costs associated with the previous corporate headquarters location.
Restaurant impairment charges during the thirty-nine week period ended March 25, 2020 primarily•Lease modification gain, net related to the long-lived and operating lease assets of 10 underperforming Chili’s restaurants.
Fiscal 2019
Foreign currency transaction (gain) loss resulting from the change in value of the Mexican peso as compared to that of the U.S. dollar on our Mexican peso denominated note receivable.
Remodel-related costs during the thirteen and thirty-nine week periods ended March 27, 2019 were recorded related to existing fixed asset write-offs associated with the Chili’s remodel project.
Restaurant closure charges during the thirteen and thirty-nine week periods ended March 27, 2019 were primarily related to Chili’s lease termination charges and certainof a previously impaired Chili’s restaurant closure costs.operating lease.
Corporate headquarters relocation charges during the thirteen and thirty-nine week periods ended March 27, 2019 included costs associated with the previous corporate headquarters location and accelerated depreciation on certain leasehold improvements associated with the leased portion of our previous corporate headquarters property which closed in the third quarter of fiscal 2019.
Loss (gain) on sale of assets, net during the thirteen and thirty-nine week periods ended March 27, 2019 primarily included $5.8 million for the net gain recognized on the sale of the owned portion of our previous corporate headquarters building, and additionally included in the thirty-nine week period ended March 27, 2019 is $0.8 million of gain recognized on the sale of land in Scottsdale, AZ and Pensacola, FL.
Restaurant impairment charges during the thirty-nine week period ended March 27, 2019 were primarily related to the long-lived assets of 2 underperforming Chili’s restaurants.
Sale leaseback (gain), net of transaction charges during the thirteen and thirty-nine week periods ended March 27, 2019 related to the fiscal 2019 sale leaseback transactions, refer to Note 4 - Leases for further details on this transaction.
7.5. INCOME TAXES
|
| | | | | | | | | | | |
| Thirteen Week Periods Ended | | Thirty-Nine Week Periods Ended |
| March 25, 2020 | | March 27, 2019 | | March 25, 2020 | | March 27, 2019 |
Effective income tax rate | (13.2 | )% | | 10.3 | % | | (0.8 | )% | | 11.7 | % |
| | | | | | | | | | | | | | | |
| | | Thirteen Week Periods Ended |
| | | | | September 23, 2020 | | September 25, 2019 |
Effective income tax rate | | | | | (4.9) | % | | 11.3 | % |
The federal statutory tax rate for allboth periods presented was 21.0%.
Fiscal 20202021
Our fiscal 2020 effective income tax ratesrate for the thirteen and thirty-nine week periodsperiod ended March 25,September 23, 2020 werewas lower than the federal statutory rate primarily due to reduced profitability related to the COVID-19 pandemic in the third quarter of fiscal 2020, andfavorable impact from the FICA tax credit in fiscal 2020. The provision for income taxes includes a significant reduction in the third quarterand excess tax windfalls associated with stock-based compensation.
A reconciliation between the reported provision for income taxes and the amount computed by applying the statutory Federal income tax rate to Provision (benefit) for income taxes is as followsfollows:
| | | | | |
| Thirteen Week Period Ended |
| September 23, 2020 |
Income tax expense at statutory rate | $ | 2.1 | |
FICA tax credit | (1.9) | |
Stock-based compensation tax windfall | (1.1) | |
State income taxes, net of federal benefit | 0.6 | |
| |
Other | (0.2) | |
Provision (benefit) for income taxes | $ | (0.5) | |
Fiscal 2020
Our effective income tax rate for the thirty-ninethirteen week period ended MarchSeptember 25, 2020:
|
| | | |
| Thirty-Nine Week Period Ended |
| March 25, 2020 |
Income tax expense at statutory rate | $ | 15.3 |
|
FICA tax credit | (22.1 | ) |
State income taxes, net of Federal benefit | 5.2 |
|
Other | 1.0 |
|
Provision (benefit) for income taxes | $ | (0.6 | ) |
Fiscal 2019
Our fiscal 2019 effective income tax rates for the thirteen and thirty-nine week periods ended March 27, 2019 werewas lower than the federal statutory rate due to the favorable impact from the FICA tax credit, partially offset by the impact of the sale leaseback transactions.credit.
The sale leaseback transactions gains, as described in Note 4 - Leases, were recognized for tax purposes when each transaction was completed during fiscal 2019, and as such, related taxes of $76.0 million were recognized during the thirty-nine week period ended March 27, 2019. We paid $75.0 million of these taxes in the thirty-nine week period ended March 27, 2019, with the remaining $1.0 million paid in the fourth quarter of fiscal 2019.
8.6. NET INCOME PER SHARE
Basic net income per share is computed by dividing Net income by the Basic weighted average shares outstanding for the reporting period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of Diluted net income per share, the Basic weighted average shares outstanding is increased by the dilutive effect of stock options and restricted share awards. Stock options and restricted share awards with an anti-dilutive effect are not included in the Diluted net income per share calculation. Basic weighted average shares outstanding are reconciled to Diluted weighted average shares outstanding as follows:
|
| | | | | | | | | | | |
| Thirteen Week Periods Ended | | Thirty-Nine Week Periods Ended |
| March 25, 2020 | | March 27, 2019 | | March 25, 2020 | | March 27, 2019 |
Basic weighted average shares outstanding | 37.2 |
| | 37.5 |
| | 37.3 |
| | 38.6 |
|
Dilutive stock options | 0.1 |
| | 0.1 |
| | 0.1 |
| | 0.2 |
|
Dilutive restricted shares | 0.5 |
| | 0.5 |
| | 0.6 |
| | 0.5 |
|
Total dilutive impact | 0.6 |
| | 0.6 |
| | 0.7 |
| | 0.7 |
|
Diluted weighted average shares outstanding | 37.8 |
| | 38.1 |
| | 38.0 |
| | 39.3 |
|
| | | | | | | |
Awards excluded due to anti-dilutive effect | 1.4 |
| | 0.8 |
| | 1.3 |
| | 0.9 |
|
| | | | | | | | | | | | | | | |
| | | Thirteen Week Periods Ended |
| | | | | September 23, 2020 | | September 25, 2019 |
Basic weighted average shares outstanding | | | | | 45.1 | | | 37.5 | |
Dilutive stock options | | | | | 0.1 | | | 0.1 | |
Dilutive restricted shares | | | | | 0.5 | | | 0.5 | |
Total dilutive impact | | | | | 0.6 | | | 0.6 | |
Diluted weighted average shares outstanding | | | | | 45.7 | | | 38.1 | |
| | | | | | | |
Awards excluded due to anti-dilutive effect | | | | | 1.6 | | | 1.4 | |
9.7. SEGMENT INFORMATION
Our operating segments are Chili’s and Maggiano’s. The Chili’s segment includes the results of our Company-ownedCompany-owned Chili’s restaurants, principally in the United States, within the full-service casual dining segment of the industry. The Chili’s segment also has Company-owned restaurants in Canada, and Canada as well asfranchised locations in the results from our domesticUnited States, 28 countries and international franchise businesses.2 United States territories. The Maggiano’s segment includes the results of our Company-owned Maggiano’s restaurants in the United States as well as the results from our domestic franchise business.
Company sales includeinclude revenues generated by the operation of Company-owned restaurants including gift card redemptions.redemptions and virtual brand revenues. Franchise and other revenues include Royalties and Franchise fees and other revenues. Franchise fees and other revenues include delivery service income, gift card breakage, franchise advertising fees, digital entertainment revenues, franchise and development fees, Maggiano’s banquet service charge income, gift card breakage, gift card equalization, merchandise income, and gift card discount costs from third-party gift card sales, advertising fees, digital entertainment revenues, delivery fee income, franchise and development fees, merchandise income, and retail royalty revenues.sales. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our
operating segments are predominantly in the United States. There were no material transactions amongst our operating segments.
Our chief operating decision maker uses Operating income as the measure for assessing performance of our segments. Operating income includes revenues and expenses directly attributable to segment-level results of operations. Company restaurant expenses include Food and beverage costs, Restaurant labor, and Restaurant expenses thatduring the periods presented primarily included restaurant rent, supplies, utilities, delivery fees, repairs and maintenance, property and equipment maintenance, advertising expenses, utilities,taxes, credit card processing fees and property taxes. Theadvertising. The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP:
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Period Ended September 23, 2020 |
| Chili’s | | Maggiano’s | | Other | | Consolidated |
Company sales | $ | 675.0 | | | $ | 53.2 | | | $ | 0 | | | $ | 728.2 | |
Royalties | 6.6 | | | 0.0 | | | 0 | | | 6.6 | |
Franchise fees and other revenues | 4.9 | | | 0.4 | | | 0 | | | 5.3 | |
Franchise and other revenues | 11.5 | | | 0.4 | | | 0 | | | 11.9 | |
Total revenues | 686.5 | | | 53.6 | | | 0 | | | 740.1 | |
| | | | | | | |
Food and beverage costs | 180.8 | | | 12.7 | | | 0 | | | 193.5 | |
Restaurant labor | 228.2 | | | 19.8 | | | 0 | | | 248.0 | |
Restaurant expenses | 181.4 | | | 20.8 | | | 0.3 | | | 202.5 | |
Depreciation and amortization | 30.6 | | | 3.6 | | | 3.2 | | | 37.4 | |
General and administrative | 5.4 | | | 1.3 | | | 23.8 | | | 30.5 | |
Other (gains) and charges | 3.6 | | | 0.1 | | | 0.1 | | | 3.8 | |
Total operating costs and expenses | 630.0 | | | 58.3 | | | 27.4 | | | 715.7 | |
Operating income (loss) | 56.5 | | | (4.7) | | | (27.4) | | | 24.4 | |
Interest expenses | 1.4 | | | 0 | | | 13.2 | | | 14.6 | |
Other income, net | (0.1) | | | 0 | | | (0.3) | | | (0.4) | |
Income (loss) before income taxes | $ | 55.2 | | | $ | (4.7) | | | $ | (40.3) | | | $ | 10.2 | |
| | | | | | | |
Segment assets | $ | 1,937.1 | | | $ | 221.8 | | | $ | 176.4 | | | $ | 2,335.3 | |
Segment goodwill | 149.3 | | | 38.4 | | | 0 | | | 187.7 | |
Payments for property and equipment | 11.6 | | | 0.5 | | | 1.5 | | | 13.6 | |
|
| | | | | | | | | | | | | | | |
| Thirteen Week Period Ended March 25, 2020 |
| Chili’s(1) | | Maggiano’s | | Other | | Consolidated |
Company sales | $ | 748.7 |
| | $ | 91.7 |
| | $ | — |
| | $ | 840.4 |
|
Royalties | 9.4 |
| | 0.1 |
| | — |
| | 9.5 |
|
Franchise fees and other revenues | 6.3 |
| | 3.8 |
| | — |
| | 10.1 |
|
Franchise and other revenues | 15.7 |
| | 3.9 |
| | — |
| | 19.6 |
|
Total revenues | 764.4 |
| | 95.6 |
| | — |
| | 860.0 |
|
| | | | | | | |
Company restaurant expenses | 648.4 |
| | 84.3 |
| | 0.1 |
| | 732.8 |
|
Depreciation and amortization | 36.5 |
| | 3.8 |
| | 3.2 |
| | 43.5 |
|
General and administrative | 5.9 |
| | 1.1 |
| | 16.3 |
| | 23.3 |
|
Other (gains) and charges | 14.9 |
| | 2.4 |
| | 2.0 |
| | 19.3 |
|
Total operating costs and expenses | 705.7 |
| | 91.6 |
| | 21.6 |
| | 818.9 |
|
Operating income (loss) | 58.7 |
| | 4.0 |
| | (21.6 | ) | | 41.1 |
|
Interest expenses | 1.1 |
| | — |
| | 13.2 |
| | 14.3 |
|
Other (income), net | (0.1 | ) | | — |
| | (0.3 | ) | | (0.4 | ) |
Income (loss) before provision for income taxes | $ | 57.7 |
| | $ | 4.0 |
| | $ | (34.5 | ) | | $ | 27.2 |
|
12 |
| | | | | | | | | | | | | | | |
| Thirteen Week Period Ended March 27, 2019 |
| Chili’s | | Maggiano’s | | Other | | Consolidated |
Company sales | $ | 709.8 |
| | $ | 101.8 |
| | $ | — |
| | $ | 811.6 |
|
Royalties | 13.4 |
| | 0.1 |
| | — |
| | 13.5 |
|
Franchise fees and other revenues | 9.5 |
| | 4.7 |
| | — |
| | 14.2 |
|
Franchise and other revenues | 22.9 |
| | 4.8 |
| | — |
| | 27.7 |
|
Total revenues | 732.7 |
| | 106.6 |
| | — |
| | 839.3 |
|
| | | | | | | |
Company restaurant expenses | 604.1 |
| | 91.2 |
| | 0.1 |
| | 695.4 |
|
Depreciation and amortization | 29.8 |
| | 3.9 |
| | 2.7 |
| | 36.4 |
|
General and administrative | 10.5 |
| | 1.3 |
| | 29.0 |
| | 40.8 |
|
Other (gains) and charges | (3.0 | ) | | — |
| | (0.5 | ) | | (3.5 | ) |
Total operating costs and expenses | 641.4 |
| | 96.4 |
| | 31.3 |
| | 769.1 |
|
Operating income (loss) | 91.3 |
| | 10.2 |
| | (31.3 | ) | | 70.2 |
|
Interest expenses | 0.6 |
| | — |
| | 14.7 |
| | 15.3 |
|
Other (income), net | — |
| | — |
| | (0.6 | ) | | (0.6 | ) |
Income (loss) before provision for income taxes | $ | 90.7 |
| | $ | 10.2 |
| | $ | (45.4 | ) | | $ | 55.5 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Period Ended September 25, 2019 | | | |
| Chili’s(1) | | Maggiano’s | | Other | | Consolidated | | | |
Company sales | $ | 677.5 | | | $ | 86.4 | | | $ | 0 | | | $ | 763.9 | | | | |
Royalties | 11.8 | | | 0.1 | | | 0 | | | 11.9 | | | | |
Franchise fees and other revenues | 6.3 | | | 3.9 | | | 0 | | | 10.2 | | | | |
Franchise and other revenues | 18.1 | | | 4.0 | | | 0 | | | 22.1 | | | | |
Total revenues | 695.6 | | | 90.4 | | | 0 | | | 786.0 | | | | |
| | | | | | | | | | |
Food and beverage costs | 182.4 | | | 21.4 | | | 0 | | | 203.8 | | | | |
Restaurant labor | 233.1 | | | 35.4 | | | 0 | | | 268.5 | | | | |
Restaurant expenses | 180.8 | | | 26.3 | | | 0.2 | | | 207.3 | | | | |
Depreciation and amortization | 30.7 | | | 4.0 | | | 3.4 | | | 38.1 | | | | |
General and administrative | 9.1 | | | 1.7 | | | 27.2 | | | 38.0 | | | | |
Other (gains) and charges | (1.6) | | | 0.1 | | | 0.6 | | | (0.9) | | | | |
Total operating costs and expenses | 634.5 | | | 88.9 | | | 31.4 | | | 754.8 | | | | |
Operating income (loss) | 61.1 | | | 1.5 | | | (31.4) | | | 31.2 | | | | |
Interest expenses | 0.9 | | | 0 | | | 14.0 | | | 14.9 | | | | |
Other income, net | (0.2) | | | 0 | | | (0.3) | | | (0.5) | | | | |
Income (loss) before income taxes | $ | 60.4 | | | $ | 1.5 | | | $ | (45.1) | | | $ | 16.8 | | | | |
| | | | | | | | | | |
Payments for property and equipment | $ | 16.1 | | | $ | 2.3 | | | $ | 2.1 | | | $ | 20.5 | | | | |
|
| | | | | | | | | | | | | | | |
| Thirty-Nine Week Period Ended March 25, 2020 |
| Chili’s(1) | | Maggiano’s | | Other | | Consolidated |
Company sales | $ | 2,154.6 |
| | $ | 297.2 |
| | $ | — |
| | $ | 2,451.8 |
|
Royalties | 31.1 |
| | 0.2 |
| | — |
| | 31.3 |
|
Franchise fees and other revenues | 17.4 |
| | 14.8 |
| | — |
| | 32.2 |
|
Franchise and other revenues | 48.5 |
| | 15.0 |
| | — |
| | 63.5 |
|
Total revenues | 2,203.1 |
| | 312.2 |
| | — |
| | 2,515.3 |
|
| | | | | | | |
Company restaurant expenses | 1,885.0 |
| | 266.6 |
| | 0.4 |
| | 2,152.0 |
|
Depreciation and amortization | 99.3 |
| | 11.8 |
| | 9.8 |
| | 120.9 |
|
General and administrative | 23.5 |
| | 4.3 |
| | 68.1 |
| | 95.9 |
|
Other (gains) and charges | 23.9 |
| | 2.5 |
| | 4.3 |
| | 30.7 |
|
Total operating costs and expenses | 2,031.7 |
| | 285.2 |
| | 82.6 |
| | 2,399.5 |
|
Operating income (loss) | 171.4 |
| | 27.0 |
| | (82.6 | ) | | 115.8 |
|
Interest expenses | 3.1 |
| | — |
| | 41.1 |
| | 44.2 |
|
Other (income), net | (0.4 | ) | | — |
| | (1.0 | ) | | (1.4 | ) |
Income (loss) before provision for income taxes | $ | 168.7 |
| | $ | 27.0 |
| | $ | (122.7 | ) | | $ | 73.0 |
|
| | | | | | | |
Segment assets(2) | $ | 2,081.7 |
| | $ | 245.1 |
| | $ | 258.6 |
| | $ | 2,585.4 |
|
Segment goodwill | 149.0 |
| | 38.4 |
| | — |
| | 187.4 |
|
Payments for property and equipment | 68.9 |
| | 6.2 |
| | 6.9 |
| | 82.0 |
|
|
| | | | | | | | | | | | | | | |
| Thirty-Nine Week Period Ended March 27, 2019 |
| Chili’s | | Maggiano’s | | Other | | Consolidated |
Company sales | $ | 1,990.7 |
| | $ | 310.7 |
| | $ | — |
| | $ | 2,301.4 |
|
Royalties | 39.5 |
| | 0.1 |
| | — |
| | 39.6 |
|
Franchise fees and other revenues | 26.6 |
| | 16.2 |
| | — |
| | 42.8 |
|
Franchise and other revenues | 66.1 |
| | 16.3 |
| | — |
| | 82.4 |
|
Total revenues | 2,056.8 |
| | 327.0 |
| | — |
| | 2,383.8 |
|
| | | | | | | |
Company restaurant expenses | 1,734.3 |
| | 275.2 |
| | 0.5 |
| | 2,010.0 |
|
Depreciation and amortization | 89.8 |
| | 11.8 |
| | 7.9 |
| | 109.5 |
|
General and administrative | 28.4 |
| | 4.5 |
| | 77.1 |
| | 110.0 |
|
Other (gains) and charges(3) | (13.9 | ) | | — |
| | 1.5 |
| | (12.4 | ) |
Total operating costs and expenses | 1,838.6 |
| | 291.5 |
| | 87.0 |
| | 2,217.1 |
|
Operating income (loss) | 218.2 |
| | 35.5 |
| | (87.0 | ) | | 166.7 |
|
Interest expenses | 2.3 |
| | 0.2 |
| | 43.8 |
| | 46.3 |
|
Other (income), net | — |
| | — |
| | (2.2 | ) | | (2.2 | ) |
Income (loss) before provision for income taxes | $ | 215.9 |
| | $ | 35.3 |
| | $ | (128.6 | ) | | $ | 122.6 |
|
| | | | | | | |
Payments for property and equipment | $ | 96.1 |
| | $ | 8.1 |
| | $ | 23.8 |
| | $ | 128.0 |
|
(1) | |
(1)
| Chili’s segment information for fiscal 2020 includes the results of operations and fair value of assets and goodwill related to the 116 restaurants purchased from a former franchisee subsequent to the 116 restaurants since the September 5, 2019 acquisition date. Refer to Note 3 - Chili’s Restaurant Acquisition for further details. |
| |
(2)
| Segment assets for fiscal 2020 are presented in accordance with the newly adopted ASC 842 that now include Operating lease assets. Refer to Note 4 - Leases for further details. |
| |
(3)
| Other (gains) and charges during the thirty-nine week period ended March 27, 2019 included the net impact from our completed sale leaseback transactions of 149 Company-owned Chili’s restaurant properties. Chili’s recognized a $22.0 million gain on the sale, including a certain portion of the deferred gain, net of related transaction costs incurred in Other (gains) and charges in the Consolidated Statements of Comprehensive Income (Unaudited). Refer to Note 4 - Leases for further details. |
10. DEBT
Long-term debt consists of the following:
|
| | | | | | | |
| March 25, 2020 | | June 26, 2019 |
Revolving credit facility | $ | 700.0 |
| | $ | 523.3 |
|
5.000% notes | 350.0 |
| | 350.0 |
|
3.875% notes | 300.0 |
| | 300.0 |
|
Finance lease obligations (Note 4) | 96.5 |
| | 48.4 |
|
Total long-term debt | 1,446.5 |
| | 1,221.7 |
|
Less: unamortized debt issuance costs and discounts | (4.6 | ) | | (5.4 | ) |
Total long-term debt, less unamortized debt issuance costs and discounts | 1,441.9 |
| | 1,216.3 |
|
Less: current installments of long-term debt and finance leases(1) | (13.0 | ) | | (9.7 | ) |
Long-term debt less current installments | $ | 1,428.9 |
| | $ | 1,206.6 |
|
| |
(1)
| Current installments of long-term debt consist only of finance leases for the periods presented and are recorded within Other accrued liabilities in the Consolidated Balance Sheets (Unaudited). Refer to Note 11 - Accrued and Other Liabilities for further details. |
Revolving Credit Facility
During the thirty-nine week period ended March 25, 2020, net borrowings of $176.7 million were drawn on the $1.0 billion revolving credit facility primarily to fund ongoing business operations, the acquisition of Chili’s restaurants (refer to Note 3 - Chili’s Restaurant Acquisition) and share repurchases. As of March 25, 2020, $300.0 million of credit was available under the revolving credit facility that was subsequently amended as described below.
The revolving credit facility generally bears interest of LIBOR plus an applicable margin, which is a function of our credit rating and debt to cash flow ratio, but is subject to a maximum of LIBOR plus 2.000%. At March 25, 2020 the revolver interest rate was 2.334% that consisted of one month LIBOR of 0.959% plus the related applicable revolver margin of 1.375%. LIBOR is set to terminate in December 2021, however our revolver will expire before this date and we anticipate any new financings will be at the applicable interest rates.
Under the revolving credit facility, the maturity date for $890.0 million of the facility is due on September 12, 2021. In the second quarter of fiscal 2020, we modified the $110.0 million portion of the revolving credit facility to extend the maturity date from March 12, 2020 to September 12, 2021, which coincides with the maturity date for the $890.0 million. We capitalized debt issuance costs of $1.0 million associated with this amendment, which are included in Other assets in the Consolidated Balance Sheets (Unaudited) at March 25, 2020.
Subsequent to the third quarter of fiscal 2020, we amended the revolving credit facility to provide additional liquidity and financial flexibility during the COVID-19 pandemic. The amendment provides a waiver of compliance with financial covenants until the end of the first quarter of fiscal 2021. As a result of this amendment, for a limited time our borrowing capacity has been reduced to $800.0 million, and the interest rate shall be increased to LIBOR plus 1.95%, with a maximum of LIBOR plus 2.25%. Additionally, the LIBOR floor was permanently increased to 0.75%. During this period, we have supplemental reporting obligations to the banks and will be prohibited from making dividends, stock repurchases and investments. Following this waiver period, we will return to $1.0 billion borrowing capacity, and also be subject to a $50.0 million aggregate limitation on dividends, stock repurchases and investments. This amendment also expanded the collateral securing the revolving credit facility, including intellectual property, among other things, and requires additional subsidiary guarantees. We have incurred certain debt issuance costs
associated with this amendment, which will be included in Other assets in the Consolidated Balance Sheets (Unaudited) in the fourth quarter of fiscal 2020.
5.000% Notes
In fiscal 2017, we completed the private offering of $350.0 million of our 5.000% senior notes due October 2024 (the “2024 Notes”). We received proceeds of $350.0 million and utilized the proceeds to fund a $300.0 million accelerated share repurchase agreement and to repay $50.0 million on the amended $1.0 billion revolving credit facility. The 2024 Notes require semi-annual interest payments which began in the fourth quarter of fiscal 2017.
3.875% Notes
In fiscal 2013, we issued $300.0 million of 3.875% notes due in May 2023 (the “2023 Notes”). The 2023 Notes require semi-annual interest payments which began in the second quarter of fiscal 2014.
Financial Covenants
Our revolving credit facility contains various financial covenants that, among other things, require the maintenance of certain leverage and fixed charge coverage ratios. As of March 25, 2020, pursuant to the amendment to the revolving credit facility described above, compliance with the financial covenants is waived until the end of the first quarter of fiscal 2021.
11. ACCRUED AND OTHER LIABILITIES
Other accrued liabilities consist of the following:
|
| | | | | | | |
| March 25, 2020 | | June 26, 2019 |
Insurance | $ | 21.0 |
| | $ | 17.9 |
|
Property tax | 18.6 |
| | 17.3 |
|
COVID-19-related costs(1) | 15.4 |
| | — |
|
Dividends(2) | 15.1 |
| | 14.9 |
|
Interest | 14.6 |
| | 7.5 |
|
Current installments of finance leases | 13.0 |
| | 9.7 |
|
Sales tax | 12.6 |
| | 14.6 |
|
Deferred franchise and development fees | 1.4 |
| | 1.4 |
|
Deferred sale leaseback gains(3) | — |
| | 19.3 |
|
Straight-line rent(3) | — |
| | 5.1 |
|
Landlord contributions(3) | — |
| | 2.7 |
|
Cyber security incident | — |
| | 0.8 |
|
Other(4) | 22.2 |
| | 29.9 |
|
| $ | 133.9 |
| | $ | 141.1 |
|
| |
(1)
| COVID-19 related costs accrued at March 25, 2020 relate to employee relief payments. Refer to Note 2 - Novel Coronavirus Pandemic for further details. |
| |
(2)
| Dividendsincluded the current dividend payable on shares outstanding and current dividends previously accrued related to restricted share awards that will vest in the next year. Other liabilitiescontain the dividends accrued related to restricted shares that will vest after one year period. Refer toNote 12 - Shareholders’ Deficitfor further details.
|
| |
(3)
| Upon the adoption of ASC 842, the Deferred sale leaseback gains were eliminated as a cumulative effect adjustment to Retained earnings. Additionally, Straight-line rent and Landlord contributions balances were reclassified as a decrease to Operating lease assets upon the adoption of ASC 842. Refer to Note 4 - Leases for further details. |
| |
(4)
| Other primarily consisted of accruals for utilities and services, charitable donations, banquet deposits for Maggiano’s events, rent-related expenses, certain exit-related lease accruals and other various accruals. Accrual balances for certain exit-related lease accruals and rent-related expenses were reclassified as a decrease to Operating lease assets upon the adoption of ASC 842. Refer to Note 4 - Leases for further details. |
Other liabilities consist of the following:
|
| | | | | | | |
| March 25, 2020 | | June 26, 2019 |
Insurance | $ | 36.7 |
| | $ | 36.8 |
|
Deferred franchise fees | 11.7 |
| | 14.8 |
|
Unrecognized tax benefits | 2.3 |
| | 2.1 |
|
Straight-line rent(1) | — |
| | 57.2 |
|
Landlord contributions(1) | — |
| | 32.9 |
|
Unfavorable leases(1) | — |
| | 2.8 |
|
Other | 6.3 |
| | 6.4 |
|
| $ | 57.0 |
| | $ | 153.0 |
|
| |
(1)
| Straight-line rent, Landlord contributions, and Unfavorable leases balances were reclassified as a decrease to Operating lease assets upon the adoption of ASC 842. Refer to Note 4 - Leases for further details. |
12. SHAREHOLDERS’ DEFICIT
The changes in Total shareholders’ deficit during the thirty-nine week periods ended March 25, 2020 and March 27, 2019, respectively, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirty-Nine Week Period Ended March 25, 2020 |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Treasury Stock | | Accumulated Other Comprehensive (Loss) Income | | Total |
Balance at June 26, 2019 | $ | 17.6 |
| | $ | 522.0 |
| | $ | 2,771.2 |
| | $ | (4,083.4 | ) | | $ | (5.6 | ) | | $ | (778.2 | ) |
Effect of ASC 842 adoption | — |
| | — |
| | 195.9 |
| | — |
| | — |
| | 195.9 |
|
Net income | — |
| | — |
| | 14.9 |
| | — |
| | — |
| | 14.9 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (0.2 | ) | | (0.2 | ) |
Dividends ($0.38 per share) | — |
| | — |
| | (14.6 | ) | | — |
| | — |
| | (14.6 | ) |
Stock-based compensation | — |
| | 7.1 |
| | — |
| | — |
| | — |
| | 7.1 |
|
Purchases of treasury stock | — |
| | (0.3 | ) | | — |
| | (11.0 | ) | | — |
| | (11.3 | ) |
Issuances of common stock | — |
| | (3.7 | ) | | — |
| | 5.0 |
| | — |
| | 1.3 |
|
Balance at September 25, 2019 | 17.6 |
| | 525.1 |
| | 2,967.4 |
| | (4,089.4 | ) | | (5.8 | ) | | (585.1 | ) |
Net income | — |
| | — |
| | 27.9 |
| | — |
| | — |
| | 27.9 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 0.1 |
| | 0.1 |
|
Dividends ($0.38 per share) | — |
| | — |
| | (14.6 | ) | | — |
| | — |
| | (14.6 | ) |
Stock-based compensation | — |
| | 2.6 |
| | — |
| | — |
| | — |
| | 2.6 |
|
Purchases of treasury stock | — |
| | 0.0 |
| | — |
| | 0.0 |
| | — |
| | 0.0 |
|
Issuances of common stock | — |
| | (0.4 | ) | | — |
| | 0.6 |
| | — |
| | 0.2 |
|
Retirement of treasury stock | (11.4 | ) | | — |
| | (3,345.4 | ) | | 3,356.8 |
| | — |
| | — |
|
Balance at December 25, 2019 | 6.2 |
| | 527.3 |
| | (364.7 | ) | | (732.0 | ) | | (5.7 | ) | | (568.9 | ) |
Net income | — |
| | — |
| | 30.8 |
| | — |
| | — |
| | 30.8 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (1.0 | ) | | (1.0 | ) |
Dividends ($0.38 per share) | — |
| | — |
| | (14.0 | ) | | — |
| | — |
| | (14.0 | ) |
Stock-based compensation | — |
| | (0.7 | ) | | — |
| | — |
| | — |
| | (0.7 | ) |
Purchases of treasury stock | — |
| | — |
| | — |
| | (21.0 | ) | | — |
| | (21.0 | ) |
Issuances of common stock | — |
| | (0.5 | ) | | — |
| | 0.6 |
| | — |
| | 0.1 |
|
Balance at March 25, 2020 | $ | 6.2 |
| | $ | 526.1 |
| | $ | (347.9 | ) | | $ | (752.4 | ) | | $ | (6.7 | ) | | $ | (574.7 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirty-Nine Week Period Ended March 27, 2019 |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Treasury Stock | | Accumulated Other Comprehensive (Loss) Income | | Total |
Balance at June 27, 2018 | $ | 17.6 |
| | $ | 511.6 |
| | $ | 2,683.0 |
| | $ | (3,924.7 | ) | | $ | (5.8 | ) | | $ | (718.3 | ) |
Effect of ASC 606 adoption | — |
| | — |
| | (7.4 | ) | | — |
| | — |
| | (7.4 | ) |
Net income | — |
| | — |
| | 26.4 |
| | — |
| | — |
| | 26.4 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 0.3 |
| | 0.3 |
|
Dividends ($0.38 per share) | — |
| | — |
| | (15.5 | ) | | — |
| | — |
| | (15.5 | ) |
Stock-based compensation | — |
| | 3.6 |
| | — |
| | — |
| | — |
| | 3.6 |
|
Purchases of treasury stock | — |
| | (7.5 | ) | | — |
| | (98.0 | ) | | — |
| | (105.5 | ) |
Issuances of common stock | — |
| | (3.8 | ) | | — |
| | 4.3 |
| | — |
| | 0.5 |
|
Balance at September 26, 2018 | 17.6 |
| | 503.9 |
| | 2,686.5 |
| | (4,018.4 | ) | | (5.5 | ) | | (815.9 | ) |
Net income | — |
| | — |
| | 32.0 |
| | — |
| | — |
| | 32.0 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (0.6 | ) | | (0.6 | ) |
Dividends ($0.38 per share) | — |
| | — |
| | (14.5 | ) | | — |
| | — |
| | (14.5 | ) |
Stock-based compensation | — |
| | 3.6 |
| | — |
| | — |
| | — |
| | 3.6 |
|
Purchases of treasury stock | — |
| | 6.9 |
| | — |
| | (69.0 | ) | | — |
| | (62.1 | ) |
Issuances of common stock | — |
| | (0.2 | ) | | — |
| | 2.5 |
| | — |
| | 2.3 |
|
Balance at December 26, 2018 | 17.6 |
| | 514.2 |
| | 2,704.0 |
| | (4,084.9 | ) | | (6.1 | ) | | (855.2 | ) |
Net income | — |
| | — |
| | 49.8 |
| | — |
| | — |
| | 49.8 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 0.2 |
| | 0.2 |
|
Dividends ($0.38 per share) | — |
| | — |
| | (14.7 | ) | | — |
| | — |
| | (14.7 | ) |
Stock-based compensation | — |
| | 5.8 |
| | — |
| | — |
| | — |
| | 5.8 |
|
Purchases of treasury stock | — |
| | 0.0 |
| | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
Issuances of common stock | — |
| | (0.9 | ) | | — |
| | 0.9 |
| | — |
| | — |
|
Balance at March 27, 2019 | $ | 17.6 |
| | $ | 519.1 |
| | $ | 2,739.1 |
| | $ | (4,084.1 | ) | | $ | (5.9 | ) | | $ | (814.2 | ) |
Retirement of Treasury Stock
In the second quarter of fiscal 2020, the Board of Directors approved the retirement of 114.0 million shares of Treasury stock for a weighted average price per share of $29.45. As of March 25, 2020, 25.3 million shares remain in treasury.
Effect of Adoption of ASC 842
In the first quarter of fiscal 2020, we adopted the lease accounting standard, ASC 842, and recorded a $195.9 million cumulative effect adjustment increase to Retained (deficit) earnings for the change in accounting principle. Refer to Note 415 - LeasesFiscal 2020 Chili’s Restaurant Acquisition for further details.
Effect of Adoption of ASC 606
In the first quarter of fiscal 2019, we adopted the revenue recognition standard, ASC 606, and recorded a $7.4 million cumulative effect adjustment decrease to Retained (deficit) earnings for the change in accounting principle.
Dividends
During the thirty-nine week periods ended March 25, 2020 and March 27, 2019, we paid dividends of $43.3 million and $46.0 million to common stock shareholders, respectively. We also declared a quarterly dividend on January 27, 2020, that was paid subsequent to the third quarter of fiscal 2020, on March 26, 2020, in the amount of $0.38 per share. As of March 25, 2020, we have accrued dividends of $14.0 million for shares outstanding in Other accrued liabilities in the Consolidated Balance Sheets (Unaudited), refer to Note 11 - Accrued and Other Liabilities for further details.
Subsequent to quarter end, our Board of Directors voted to suspend the quarterly cash dividend due to uncertainty surrounding the duration of closures of our dining rooms and other restrictions mandated by state and local governments in response to COVID-19. The Board of Directors will reevaluate the suspension as developments surrounding the COVID-19 pandemic mature. There is significant uncertainty regarding the future impact of the pandemic on the restaurant industry and the broader US economy.
Stock-based Compensation
The following table presents the stock options and restricted share awards granted, and related weighted average exercise price and fair value per share amounts.
|
| | | | | | | |
| Thirty-Nine Week Periods Ended |
| March 25, 2020 | | March 27, 2019 |
Stock options | | | |
Stock options granted | 0.3 |
| | 0.7 |
|
Weighted average exercise price per share | $ | 38.51 |
| | $ | 43.63 |
|
Weighted average fair value per share | $ | 6.83 |
| | $ | 8.25 |
|
Restricted share awards | | | |
Restricted share awards granted | 0.3 |
| | 0.3 |
|
Weighted average fair value per share | $ | 38.68 |
| | $ | 43.52 |
|
Share Repurchases
Our share repurchase program has been 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. The repurchased shares during the thirty-nine week periods ended March 25, 2020 and March 27, 2019, respectively, included shares purchased as part of our share repurchase program and shares repurchased to satisfy team member tax withholding obligations on the vesting of restricted shares.
Thirty-Nine Week Period Ended March 25, 2020
During the thirty-nine week period ended March 25, 2020, we repurchased 0.8 million shares of our common stock for $32.3 million. As of March 25, 2020, approximately $166.8 million was available under our share repurchase authorizations. Subsequent to the third quarter of fiscal 2020, our Board of Directors has suspended our share repurchase program as a result of the COVID-19 impact.
Thirty-Nine Week Period Ended March 27, 2019
In August 2018, our Board of Directors authorized a $300.0 million increase to our existing share repurchase program resulting in total authorizations of $4.9 billion. During the thirty-nine week period ended March 27, 2019, we repurchased 3.6 million shares of our common stock for $167.7 million.
13.8. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that we would receive to sellbe received for an asset or paypaid to transfer a liability, or the exit price, in an orderly transaction between market participants on the measurement date. In determining fairFair value is grouped in three levels based on the accounting standards establish a three level hierarchy forof significant inputs used in measuring fair value, as follows:
Level 1 - inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 - inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities.
Level 3 - inputs are unobservable and reflect our own assumptions.
| | | | | |
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities |
Level 2 | Observable inputs available at measurement date other than quote prices included in Level 1 |
Level 3 | Unobservable inputs that cannot be corroborated by observable market data |
Non-Financial Assets Measured on a Non-Recurring Basis
We review the carrying amounts of long-lived property and equipment, operating lease assets, reacquired franchise rights and transferable liquor licenses semi-annually or when events or circumstances indicate that the fair value may not substantially exceed the carrying amount. We record an impairment charge for the excess of the carrying amount over the fair value. All impairment charges were included in Other (gains) and charges in the Consolidated Statements of Comprehensive Income for the periods presented. Refer to Note 6 - Other Gains and Charges for more information. Refer to Note 2 - Novel Coronavirus Pandemic for further details on the analysis of the COVID-19 pandemic as a potential triggering event for impairment in the third quarter of fiscal 2020.
During the thirty-nine week period ended March 25, 2020, we impaired certain long-lived and lease assets primarily related to 10 underperforming Chili’s restaurants. Additionally, we impaired certain finance and operating lease assets related to previously closed Chili’s restaurants. During the thirty-nine week period ended March 27, 2019, we impaired certain long-lived assets primarily related to 2 underperforming restaurants. We determined the fair value of these assets based on Level 3 fair value measurements. The table below presents the carrying values and related impairment expenses recorded on these impaired restaurants for the periods presented.
|
| | | | | | | | | | | | | | | |
| | | | | Impairment Charges |
| Pre-Impairment Carrying Value | | Thirty-Nine Week Periods Ended |
| March 25, 2020 | | March 27, 2019 | | March 25, 2020 | | March 27, 2019 |
Underperforming restaurants | | | | | | | |
Long-lived assets | $ | 4.5 |
| | $ | 1.0 |
| | $ | 4.5 |
| | $ | 1.0 |
|
Finance lease assets | 0.1 |
| | — |
| | 0.1 |
| | — |
|
Total underperforming restaurants | $ | 4.6 |
| | $ | 1.0 |
| | $ | 4.6 |
| | $ | 1.0 |
|
Closed restaurants | | | | | | | |
Operating lease assets | $ | 6.4 |
| | $ | — |
| | $ | 1.8 |
| | $ | — |
|
Finance lease assets | 5.8 |
| | — |
| | 1.4 |
| | — |
|
Total closed restaurants | $ | 12.2 |
| | $ | — |
| | $ | 3.2 |
| | $ | — |
|
Intangibles, net in the Consolidated Balance Sheets (Unaudited) includes both indefinite-lived intangible assets such as the transferable liquor licenses and definite-lived intangible assets that include reacquired franchise rights and other items such as trademarks. Intangibles, net included accumulated amortization associated with definite-lived intangible assets at March 25,September 23, 2020 and June 26, 2019,24, 2020, of $7.1$8.0 million and $7.0$7.5 million, respectively.
Definite Lived Assets Impairment
Definite lived assets include property, equipment, operating lease assets, and reacquired franchise rights. During the thirteen week periods ended September 23, 2020 and September 25, 2019, no indicators of impairment existed.
Indefinite Lived Assets Impairment
We determine the fair value of transferable liquor licenses based on prices in the open market for licenses in the same or similar jurisdictions that is considered Level 2. During the thirteen and thirty-nine week periods ended March 25,September 23, 2020 and March 27,September 25, 2019, no indicators of impairment were identified.
Goodwill
We review the carrying amounts of goodwill annually or when events or circumstances indicate that the carrying amount may not be recoverable. We may elect to perform a qualitative assessment for our reporting units to determine whether it is more likely than not that the fair value of the reporting unit is greater than its carrying value. If a qualitative assessment is not performed, or if the result of the qualitative assessment indicates a potential impairment, then the reporting unit’s fair value is compared to its carrying value. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the implied fair value of the goodwill.
Related to the qualitative assessment, changes in circumstances existing at the measurement date or at other times in the future, such as declines in our market capitalization, as well as in the market capitalization of other companies in the restaurant industry, declines in sales at our restaurants, and significant adverse changes in the operating environment for the restaurant industry could result in an impairment loss of all or a portion of our goodwill.
We performed our goodwill impairment tests at the end of the second quarter of fiscal 2019 and fiscal 2020 in accordance with our policy and no indicators of impairment were identified. Refer to Note 2 - Novel Coronavirus Pandemic for further details on the updated analysis of the COVID-19 pandemic as a triggering event for impairmentdetailed quantitative assessment in the third quarter of fiscal 2020.
Chili’s Restaurant Acquisition
In2020 of our goodwill balances associated with both reporting units. This assessment was performed in response to observed indicators of impairment that were primarily driven by the impact of the COVID-19 pandemic on our business. These indicators were significant declines in operating cash flows and market capitalization. Based on this assessment, we concluded that our goodwill and indefinite-lived intangible assets were not impaired at that time. We updated this assessment in the fourth quarter of fiscal 2020 and again concluded no impairment triggering event existed based on improved market capitalization and improved operating results compared to projections in the detailed quantitative assessment prepared in the third quarter of fiscal 2020. Our operating results and operating cash flows have continued to outperform our initial quantitative assessment in the first quarter of fiscal 2020,2021. Our stock price and market capitalization have also increased to levels greater than before the COVID-19 pandemic began in the United States. As a result, we completedhave not performed a quantitative analysis in the acquisitionfirst quarter of 116 Chili’s restaurants. The fair value of assets acquired, including goodwill, and liabilities assumed for these restaurants utilized Level 3 inputs. The fair values of intangible assets acquired were primarilyfiscal 2021; however, based on significant inputs not observable in an active market, including estimatesthese qualitative factors, Management has concluded no triggering event exists. Our ability to operate dining and banquet rooms and generate off-premise sales at our restaurants is critical to avoiding a future triggering event as the impact of replacement costs, future cash flows,the COVID-19 pandemic continues. Management’s judgments about the impact of the pandemic could change as additional developments occur. We will continue to monitor and discount rates. Referevaluate our results to Note 3 - Chili’s Restaurant Acquisition for further details.determine if more a more detailed assessment is necessary.
Other Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amounts because of the short maturity of these items.
Long-Term Debt
The carrying amount of debt outstanding related to the amended revolving credit facility approximates fair value as the interest rate on this instrument approximates current market rates (Level 2). The fair values of the 3.875% and 5.000% notes are based on quoted market prices and are considered Level 2 fair value measurements.
The 3.875% notes and 5.000% notes carrying amounts, which are net of unamortized debt issuance costs and discounts, and fair values of the 3.875% notes and 5.000% notes are as follows, refer to Note 10 - Debt for further details:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 23, 2020 | | June 24, 2020 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
3.875% notes | $ | 299.1 | | | $ | 293.3 | | | $ | 299.0 | | | $ | 282.8 | |
5.000% notes | 346.9 | | | 357.4 | | | 346.7 | | | 330.8 | |
|
| | | | | | | | | | | | | | | |
| March 25, 2020 | | June 26, 2019 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
3.875% notes | $ | 298.9 |
| | $ | 194.3 |
| | $ | 298.6 |
| | $ | 296.3 |
|
5.000% notes | 346.5 |
| | 213.5 |
| | 345.9 |
| | 356.2 |
|
The decrease in fair value14
Note Receivable
During fiscal 2018, we received an $18.0 million long-term note receivable as consideration related to the sale of our equity interest in the Chili’s joint venture in Mexico. We determined the fair value of this note based on an internally developed analysis relying on Level 3 inputs at inception. This analysis was based on a credit rating we assigned to the counterparty and comparable interest rates associated with similar debt instruments observed in the market. As a result of the initialthis analysis, we determined the fair value of this note was approximately $16.0 million and recorded this fair value as its initial carrying value. We believe the fair value of the note receivable continues to approximate the note receivable carrying value, which at March 25,as of September 23, 2020 was $7.0 million. The current portion of the note which represents the cash payments to be received over the next 12 months and is included within Accounts receivable, net while the long-term portion of the note is included inwithin Other assets in the Consolidated Balance Sheets (Unaudited).
9. LEASES
We typically lease our restaurant facilities through ground leases (where we lease land only, but construct the building and improvements) or retail leases (where we lease the land/retail space and building). In addition to our restaurant facilities, we also lease our corporate headquarters location and certain equipment.
Lease Amounts Included in the Consolidated Statements of Comprehensive Income (Unaudited)
The components of lease expenses included in the Consolidated Statements of Comprehensive Income (Unaudited) were as follows:
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| Thirteen Week Periods Ended |
| September 23, 2020 | | September 25, 2019 |
Operating lease cost | $ | 41.7 | | | $ | 37.3 | |
Variable lease cost | 14.0 | | | 13.3 | |
Finance lease amortization | 4.0 | | | 2.7 | |
Finance lease interest | 1.5 | | | 0.9 | |
Short-term lease cost | 0.1 | | | 0.2 | |
Sublease income | (1.0) | | | (1.2) | |
Total lease costs, net | $ | 60.3 | | | $ | 53.2 | |
Lease Maturity Analysis
As of September 23, 2020, the discounted future minimum lease payments on finance and operating leases, as well as sublease income, were as follows:
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| September 23, 2020 |
Fiscal Year | Finance Leases | | Operating Leases | | Sublease Income |
Remainder of 2021 | $ | 17.5 | | | $ | 135.8 | | | $ | 2.5 | |
2022 | 22.4 | | | 169.2 | | | 3.2 | |
2023 | 20.9 | | | 157.6 | | | 2.6 | |
2024 | 11.4 | | | 146.6 | | | 1.9 | |
2025 | 9.0 | | | 136.6 | | | 1.8 | |
Thereafter | 53.6 | | | 864.5 | | | 4.8 | |
Total future lease payments(1) | 134.8 | | | 1,610.3 | | | $ | 16.8 | |
Less: Imputed interest | 31.0 | | | 447.3 | | | |
Present value of lease liability | $ | 103.8 | | | $ | 1,163.0 | | | |
(1)Finance and Operating leases total future lease payments represent the contractual obligations due under the contract, including certain cancellable option periods where we are reasonably assured to exercise the
options. Included in the Total future lease payments as of September 23, 2020 was non-cancelable lease commitments of $114.0 million for finance leases, and $1,065.8 million for operating leases.
10. DEBT
Long-term debt consists of the following:
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| September 23, 2020 | | June 24, 2020 |
Revolving credit facility | $ | 426.3 | | | $ | 472.9 | |
5.000% notes | 350.0 | | | 350.0 | |
3.875% notes | 300.0 | | | 300.0 | |
Finance lease obligations | 103.8 | | | 102.1 | |
Total long-term debt | 1,180.1 | | | 1,225.0 | |
Less: unamortized debt issuance costs and discounts | (4.1) | | | (4.3) | |
Total long-term debt, less unamortized debt issuance costs and discounts | 1,176.0 | | | 1,220.7 | |
Less: current installments of long-term debt(1) | (17.7) | | | (12.2) | |
Long-term debt less current installments | $ | 1,158.3 | | | $ | 1,208.5 | |
(1)Current installments of long-term debt consist only of finance leases for the periods presented and are recorded within Other accrued liabilities in the Consolidated Balance Sheets (Unaudited). Refer to Note 611 - Accrued and Other Gains and ChargesLiabilities for further details about this note receivable.details.
Revolving Credit Facility
In the thirteen week period ended September 23, 2020, net repayments of $46.6 million were made on the $1.0 billion revolving credit facility. As of September 23, 2020, $573.7 million of credit was available under the revolving credit facility.
Amended Revolving Credit Agreement
In the first quarter of fiscal 2021, we executed the seventh amendment to our revolving credit facility. This amendment extended the maturity date to December 12, 2022, and required a capacity reduction to $900.0 million from $1.0 billion on September 12, 2021. The issuance of certain debt or preferred equity interests will result in an immediate capacity reduction, an interest rate reduction of 0.250% on the spread, and 0.100% reduction on the undrawn fee if the issuance exceeds $250.0 million pursuant to the terms of the agreement.
The revolving credit facility bears interest of LIBOR, through December 2021, plus an applicable margin of 2.250% to 3.000% and an undrawn commitment fee of 0.350% to 0.500%, both based on a function of our debt-to-cash-flow ratio. Upon LIBOR’s expiration in December 2021, our interest rate will be a function of a similar, publicly available, Eurodollar rate. As of September 23, 2020, our interest rate was 3.750% consisting of the LIBOR floor of 0.750% plus the applicable margin of 3.000%.
During the first quarter of fiscal 2021, we incurred $1.5 million of debt issuance costs, associated with the revolver amendment, which are included in Other assets in the Consolidated Balance Sheets (Unaudited).
5.000% Notes
In fiscal 2017, we completed the private offering of $350.0 million of our 5.000% senior notes due October 2024, our fiscal 2025 (the “2024 Notes”). We received proceeds of $350.0 million and utilized the proceeds to fund a $300.0 million accelerated share repurchase agreement and to repay $50.0 million on the amended $1.0 billion revolving credit facility. The notes require semi-annual interest payments which began on April 1, 2017.
The indenture for the 2024 Notes contains certain covenants, including, but not limited to, limitations and restrictions on the ability of the Company and its Restricted Subsidiaries (as defined in the indenture) to (i) create liens on Principal Property (as defined in the Indenture) and (ii) merge, consolidate or amalgamate with or into any
other person or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all of their property. These covenants are subject to a number of important conditions, qualifications, exceptions and limitations.
14.3.875% Notes
In fiscal 2013, we issued $300.0 million of 3.875% notes due in May 2023, our fiscal 2023. These “2023 Notes” require semi-annual interest payments which began in the second quarter of fiscal 2014.
Financial Covenants
Our debt agreements contain various financial covenants that, among other things, require the maintenance of certain leverage and fixed charge coverage ratios. As of September 23, 2020, pursuant to the amended revolving credit facility and under the terms of the indentures governing our 2023 Notes and 2024 Notes, we are in compliance with our covenants. We expect to remain in compliance with our covenants during the remainder of fiscal 2021.
11. ACCRUED AND OTHER LIABILITIES
Other accrued liabilities consist of the following:
| | | | | | | | | | | |
| September 23, 2020 | | June 24, 2020 |
Property tax | $ | 27.0 | | | $ | 22.9 | |
Insurance | 21.3 | | | 20.7 | |
Sales tax | 18.0 | | | 13.3 | |
Current installments of finance leases | 17.7 | | | 12.2 | |
Interest | 14.9 | | | 7.5 | |
Utilities and services | 8.4 | | | 8.3 | |
Cyber security incident | 3.4 | | | 3.4 | |
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Other(1) | 11.2 | | | 12.3 | |
| $ | 121.9 | | | $ | 100.6 | |
(1)Other primarily consists of accruals for banquet deposits for Maggiano’s events, charitable donations, rent-related expenses, deferred franchise and development fees, and other various accruals.
Other liabilities consist of the following:
| | | | | | | | | | | |
| September 23, 2020 | | June 24, 2020 |
Deferred payroll taxes(1) | $ | 34.2 | | | $ | 12.9 | |
Insurance | 33.5 | | | 33.7 | |
Deferred franchise fees | 11.4 | | | 11.6 | |
Unrecognized tax benefits | 2.1 | | | 2.1 | |
Other | 6.2 | | | 6.8 | |
| $ | 87.4 | | | $ | 67.1 | |
(1) Deferred payroll taxes primarily consists of the deferral of the employer portion of certain payroll related taxes as allowed under the CARES Act which will be repaid in two equal installments on December 31, 2021, and December 31, 2022.
12. SHAREHOLDERS’ DEFICIT
The changes in Total shareholders’ deficit during the thirteen week periods ended September 23, 2020 and September 25, 2019, respectively, were as follows:
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| Thirteen Week Period Ended September 23, 2020 |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
Balance at June 24, 2020 | $ | 7.0 | | | $ | 669.4 | | | $ | (397.5) | | | $ | (751.8) | | | $ | (6.2) | | | $ | (479.1) | |
Net income | 0 | | | 0 | | | 10.7 | | | 0 | | | 0 | | | 10.7 | |
Other comprehensive income | 0 | | | 0 | | | 0 | | | 0 | | | 0.3 | | | 0.3 | |
Dividends | 0 | | | 0 | | | 0.0 | | | 0 | | | 0 | | | 0.0 | |
Stock-based compensation | 0 | | | 3.9 | | | 0 | | | 0 | | | 0 | | | 3.9 | |
Purchases of treasury stock | 0 | | | (1.1) | | | 0 | | | (2.8) | | | 0 | | | (3.9) | |
Issuances of common stock | 0 | | | (9.0) | | | 0 | | | 12.0 | | | 0 | | | 3.0 | |
Balance at September 23, 2020 | $ | 7.0 | | | $ | 663.2 | | | $ | (386.8) | | | $ | (742.6) | | | $ | (5.9) | | | $ | (465.1) | |
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| Thirteen Week Period Ended September 25, 2019 |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
Balance at June 26, 2019 | $ | 17.6 | | | $ | 522.0 | | | $ | 2,771.2 | | | $ | (4,083.4) | | | $ | (5.6) | | | $ | (778.2) | |
Effect of ASC 842 adoption | — | | | — | | | 195.9 | | | — | | | — | | | 195.9 | |
Net income | 0 | | | 0 | | | 14.9 | | | 0 | | | 0 | | | 14.9 | |
Other comprehensive loss | 0 | | | 0 | | | 0 | | | 0 | | | (0.2) | | | (0.2) | |
Dividends ($0.38 per share) | 0 | | | 0 | | | (14.6) | | | 0 | | | 0 | | | (14.6) | |
Stock-based compensation | 0 | | | 7.1 | | | 0 | | | 0 | | | 0 | | | 7.1 | |
Purchases of treasury stock | 0 | | | (0.3) | | | 0 | | | (11.0) | | | 0 | | | (11.3) | |
Issuances of common stock | 0 | | | (3.7) | | | 0 | | | 5.0 | | | 0 | | | 1.3 | |
Balance at September 25, 2019 | $ | 17.6 | | | $ | 525.1 | | | $ | 2,967.4 | | | $ | (4,089.4) | | | $ | (5.8) | | | $ | (585.1) | |
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Dividends
In the fourth quarter of fiscal 2020, our quarterly cash dividend was suspended in response to the COVID-19 pandemic. Before this suspension, our Board of Directors approved quarterly dividends of $0.38 per share paid quarterly. In the thirteen week period ended September 23, 2020, dividends paid solely related to the previously accrued dividends for restricted share awards that vested in the period. Restricted share award dividends are accrued in Other accrued liabilities for the current portion to vest within 12 months, and Other liabilities for the portion that will vest after one year. Before the suspension, in the thirteen week period ended September 25, 2019, we paid dividends of $14.8 million to common stock shareholders.
Stock-based Compensation
The following table presents the stock options and restricted share awards granted, and related weighted average exercise price and fair value per share amounts.
| | | | | | | | | | | |
| Thirteen Week Periods Ended |
| September 23, 2020 | | September 25, 2019 |
Stock options | | | |
Stock options granted | 0 | | | 0.3 | |
Weighted average exercise price per share | $ | 0 | | | $ | 38.51 | |
Weighted average fair value per share | $ | 0 | | | $ | 6.83 | |
Restricted share awards | | | |
Restricted share awards granted | 0.5 | | | 0.3 | |
Weighted average fair value per share | $ | 39.76 | | | $ | 38.51 | |
Share Repurchases
In the fourth quarter of fiscal 2020, our share repurchase program was suspended in response to the COVID-19 pandemic. Prior to the suspension, our share repurchase program was used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. We evaluated 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. Repurchased shares are reflected as an increase in Treasury stock within Shareholders’ deficit in the Consolidated Balance Sheets (Unaudited).
In the thirteen week period ended September 23, 2020, we repurchased 0.1 million shares from team members to satisfy tax withholding obligations on the vesting of restricted shares. Before the suspension, in the thirteen week period ended September 25, 2019, we repurchased 0.3 million shares of our common stock for $11.3 million.
Effect of Adoption of ASC 842
In the first quarter of fiscal 2020, we adopted the lease accounting standard, ASC 842, and recorded a $195.9 million cumulative effect adjustment increase to Retained earnings for the change in accounting principle.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest is as follows:
| | | | | | | | Thirteen Week Periods Ended |
| Thirty-Nine Week Periods Ended | | September 23, 2020 | | September 25, 2019 |
| March 25, 2020 | | March 27, 2019 | |
Income taxes, net of refunds(1) | $ | (4.7 | ) | | $ | 97.2 |
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Income taxes, net of (refunds) | | Income taxes, net of (refunds) | $ | (2.1) | | | $ | (11.8) | |
Interest, net of amounts capitalized | 32.6 |
| | 34.7 |
| Interest, net of amounts capitalized | 5.5 | | | 6.1 | |
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(1)
| Income taxes, net of refunds decreased for the thirty-nine week period ended March 25, 2020 as compared to the thirty-nine week period ended March 27, 2019 primarily due to payments made for income tax liabilities resulting from the sale leaseback transactions completed in the first quarter of fiscal 2019 and receipt of a refund in the first quarter of fiscal 2020, partially offset by current year payments. Refer to Note 4 - Leases and Note 7 - Income Taxes for further details. |
Non-cash investing and financing activities are as follows:
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| Thirteen Week Periods Ended |
| September 23, 2020 | | September 25, 2019 |
Retirement of fully depreciated assets | $ | 2.5 | | | $ | 4.3 | |
Dividends declared but not paid | 0 | | | 14.6 | |
Accrued capital expenditures | 6.4 | | | 14.2 | |
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| Thirty-Nine Week Periods Ended |
| March 25, 2020 | | March 27, 2019 |
Retirement of fully depreciated assets | $ | 14.0 |
| | $ | 23.2 |
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Dividends declared but not paid | 14.8 |
| | 15.2 |
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Accrued capital expenditures | 14.7 |
| | 10.7 |
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Capital lease additions(1) | — |
| | 2.5 |
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| Capital lease additions for the thirty-nine week period ended March 25, 2020 are now disclosed as part of the finance lease disclosures in Note 4 - Leases, “Consolidated Statement of Cash Flows Disclosure of Lease Amounts” section.
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15.
14. CONTINGENCIES
Lease Commitments
We have, in certain cases, divested brands or sold restaurants to franchisees and have not been released from lease guarantees for the related restaurants. As of March 25,September 23, 2020 and June 26, 2019,24, 2020, we have outstanding lease guarantees or are secondarily liable for $41.7$37.7 million and $55.3$39.7 million, respectively. These amounts represent the expected maximum potential liability of future rent payments under the leases. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from fiscal 2021 through fiscal 2028. Our secondary liability position was reduced approximately $9.3 million in the thirty-nine week period ended March 25, 2020 due to certain leases associated with the acquisition of 116 restaurants from a franchisee, refer to Note 3 - Chili’s Restaurant Acquisition for further details.2027. In the event of default under a lease by a franchisee or owner of a divested brand, the indemnity and default clauses in our agreements with such third parties and applicable laws govern our ability to pursue and recover amounts we may pay on behalf of such parties.
We are monitoring our lease guarantees during the COVID-19 pandemic, and at this time we believe the pandemic will be temporary and, as of the third quarter of fiscal 2020, there have been no notices of default pertaining to these leases. Therefore we believe the loss is not probable at this time, and we will continue to closely monitor this situation.
Letters of Credit
We provide letters of credit to various insurers to collateralize obligations for outstanding claims. As of March 25,September 23, 2020, we had $27.2$29.5 million in undrawn standby letters of credit outstanding. All standby letters of credit are renewable within the next 1 to 1312 months.
Cyber Security Incident
On May 12,In fiscal 2018, we issued a public statement thatdiscovered malware had been discovered at certain Chili’s restaurants that may have resulted in unauthorized access or acquisition of customer payment card data. We engaged third-party forensic firms and cooperated with law enforcement
Cyber Security Related Charges
To limit our exposure to investigatecyber security events, we maintain cyber liability insurance coverage. Our cyber liability insurance policy contained a $2.0 million retention that was fully accrued during fiscal 2018. Since the matter. Based on the investigationincident, through September 23, 2020, we have incurred total cumulative costs of our third-party forensic experts, we believe most Company-owned Chili’s restaurants were impacted by the malware during time frames that vary by restaurant, but we believe in each case began no earlier than March 21, 2018 and ended no later than April 22, 2018.
We expect$8.2 million related to incur legal and professional services expenses associated with the cyber security incidentincident. This includes the $2.0 million retention recorded, $2.2 million in future periods, which could be material. We will recognize these expenses as servicescosts that have been reimbursed by our insurance carriers, $3.5 million of receivables for costs incurred that we believe are received. Related to this incident, payment card companiesreimbursable and associations may request us to reimburse them for unauthorized card chargesprobable of recovery under our insurance coverage and $0.5 million of costs to replace cards and may also impose fines or penalties in connection with the cyber security incident, and regulatory authorities may also impose fines or other remedies against us. While we do not acknowledge responsibility to pay any such amounts imposedreimbursable by any third parties, we may become obligated to pay such amounts or incur significant related settlement costs. our insurance carriers.
We have settled claims from twothree payment card companies, and the settlement amounts are included in the costs described above. We may incur legal and professional services expenses in future periods. In the following paragraph. Weevent of future litigation, we will record an estimate for any additional losses at the time when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.
To limit our exposure to cyber security events, we maintain cyber liability insurance coverage. This coverage and certain other insurance coverage may reduce our exposure for this incident. Our cyber liability insurance policy contains a $2.0 million retention that was fully accrued during fiscal 2018. Since the incident, through March 25, 2020, we have incurred cumulative costs of $4.4 million related to the cyber security incident. This includes the $2.0 million retention recorded in fiscal 2018, $1.7 million in costs that have been reimbursed by our insurance carriers, and $0.2 million of receivable for costs incurred that we believe are reimbursable and probable of recovery under our insurance coverage, and an additional $0.4 million during fiscal 2019 and $0.1 million during fiscal 2020 for expenses not believed to be covered by our insurance coverage recorded to Other (gains) and charges in the Consolidated Statements of Comprehensive Income (Unaudited).Cyber Security Litigation
The Company was named as a defendant in a putative class action lawsuit in the United States District Court for the Middle District of Florida styled In re: Brinker Data Incident Litigation, Case No. 18-cv-00686-TJC-MCR (the(the “Litigation”) relating to the cyber security incident described above. In the Litigation, plaintiffs assert various claims stemming from the cyber security incident at the Company’s Chili’s restaurants involving customer payment card information and seek monetary damages in excess of $5.0 million, injunctive and declaratory relief, and attorney’s fees and costs.
On January 4, 2019, we filed a MotionJuly 27, 2020, the Court granted our second motion to Dismissdismiss as to all of plaintiffs’Plaintiffs’ claims asserting that plaintiffs do not havefor injunctive relief on Article III standing grounds, dismissing Plaintiffs’ declaratory judgment and Florida Deceptive and Unfair Trade Practices Act (FDUTPA) claims outright and dismissing the injunctive relief portions of their UCL claims. The Court further ordered Brinker to bring the lawsuit and that plaintiffs have failedfile an answer to state a claim on which relief can be granted.
Following completion of briefingPlaintiffs’ Third Amended Complaint by the parties, the court conducted a hearing on our motion on June 24, 2019. On August 1, 2019, the court granted our Motion to Dismiss for lack of standing as to two plaintiffs and denied the motion as to the remaining plaintiffs. On January 28,23, 2020, the court granted in part and denied in part the remaining portion of our Motion to Dismiss, and ordered the parties to mediate the case by November 20, 2020, prior to the class certification hearing in January 2021. Plaintiffs filed their motion for class certification on August 31, 2020, and Brinker’s deadline to file their third amended complaint by February 28, 2020 and the partiesits opposition to file a revised case management report on March 27,Plaintiffs’ motion is October 30, 2020. The parties complied with each of these deadlines. On March 5, 2020, the court granted our MotionMediation is scheduled for Protection in its entirety. Discovery remains stayed pending entry of a new case management and scheduling order. November 18, 2020.
We believe we have defenses and intend to continue defending the Litigation. As such, as of March 25,September 23, 2020, we have concluded that a loss, or range of loss, from this matter is not determinable, therefore, we have not recorded
a liability related to the Litigation. We will continue to evaluate this matter based on new information as it becomes available.
Legal Proceedings
Evaluating contingencies related to litigation is a complex process involving subjective judgment on the potential outcome of future events, and the ultimate resolution of litigated claims may differ from our current analysis. Accordingly, we review the adequacy of accruals and disclosures pertaining to litigated matters each quarter in consultation with legal counsel and we assess the probability and range of possible losses associated with contingencies for potential accrual in the Consolidated Financial Statements.
We are engaged in various legal proceedings and have certain unresolved claims pending. Liabilities have been established based on our best estimates of our potential liability in certain of these matters. Based upon consultation with legal counsel, management is of the opinion that there are 0 matters pending or threatened which are expected to have a material adverse effect, individually or in the aggregate, on the consolidated financial condition or results of operations.
16. EFFECT OF NEW ACCOUNTING STANDARDS15. FISCAL 2020 CHILI’S RESTAURANT ACQUISITION
ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments - In June 2013, the FASB issued ASU 2016-13, creating ASC Topic 326 – Financial Instruments – Credit Losses. ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on financial assets measured at amortized cost basis (including, but not limited to loans), net investments in leases recognized as lessor and off-balance sheet credit exposures. ASU 2016-13 eliminates the probable initial recognition threshold under the current incurred loss methodology for recognizing credit losses. Instead, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The new guidance is effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, which will require us to adopt these provisions in the first quarter of fiscal 2021.2020, on September 5, 2019, we completed the acquisition of certain assets and liabilities related to 116 previously franchised Chili’s restaurants located in the Midwest United States. Pro-forma financial information of the acquisition is not presented due to the immaterial impact of the financial results of the acquired restaurants in the Consolidated Financial Statements (Unaudited).
Total cash consideration of $96.0 million, including post-closing adjustments, was funded with borrowings from our existing credit facility. We expectaccounted for this acquisition as a business combination. The results of operations, and assets and liabilities, of these restaurants are included in the Consolidated Financial Statements (Unaudited) from the date of acquisition. The assets and liabilities of these restaurants are recorded at their fair values.
A preliminary net acquisition-related gain of $0.5 million was recorded during the thirteen week period ended September 25, 2019 to adopt this updateOther (gains) and charges in the Consolidated Statements of Comprehensive Income (Unaudited) that consisted of $2.6 million of franchise deferred revenues balance that were fully recognized at the date of the acquisition, partially offset by $1.5 million of professional services, transaction and transition related costs associated with the purchase, and $0.6 million of related franchise straight-line rent balances, net of market leasehold improvement adjustments that were fully recognized at the date of the acquisition.
The final purchase price accounting was completed in the third quarter of fiscal 2020, and the final amounts recorded for the fair value of acquired assets and liabilities at the acquisition date were as follows:
| | | | | |
| Fair Value September 5, 2019 |
Current assets(1) | $ | 7.3 | |
Property and equipment | 60.3 | |
Operating lease assets | 163.5 | |
Reacquired franchise rights(2) | 6.9 | |
Goodwill(3) | 22.4 | |
Total assets acquired | 260.4 | |
Current liabilities(4) | 9.1 | |
Operating lease liabilities, less current portion | 158.3 | |
Total liabilities assumed | 167.4 | |
Net assets acquired(5) | $ | 93.0 | |
(1)Current assets included petty cash, inventory, and restaurant supplies.
(2)Reacquired franchise rights have a weighted average amortization period of approximately 8 years.
(3)Goodwill is expected to be deductible for tax purposes. The portion of the purchase price attributable to goodwill represents the benefits expected as a result of the acquisition, including sales and unit growth opportunities, and the benefit of the assembled workforce of the acquired restaurants.
(4)Current liabilities included current portion of operating lease liabilities, gift card liability and accrued property tax.
(5)Net assets acquired at fair value are equal to the total purchase price of $99.0 million, less $3.2 million of closing adjustments and $2.8 million allocated to prepayment of leases entered into between us and the franchisee.
16. SUBSEQUENT EVENTS
Revolver Activity
Subsequent to the first quarter of fiscal 2021, and do not expect the adoption$20.0 million of this guidance to have a material impact in the Consolidated Financial Statements.
ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement - In August 2018, the FASB issued ASU 2018-13, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments under ASU 2018-13 add an incremental requirement, among others, for entities to disclose (1) the range and weighted average used to develop significant unobservable inputs and (2) how the weighted average was calculated for fair value measurements categorized within Level 3 of the fair value hierarchy. Entities may disclose other quantitative information in lieu of the weighted average if they determine that such information embodies a more reasonable and rational method of reflecting the distribution of significant unobservable inputs used to develop Level 3 fair value measurements. The new guidance is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, which will require us to adopt these provisions in the first quarter of fiscal 2021. Early adoption is permitted. We expect to adopt this update in the first quarter of fiscal 2021 and do not expect the adoption of this guidance to have a material impact in the Consolidated Financial Statements.
ASU No. 2019-12, Simplifying the Accounting for Income Taxes - In December 2019, the FASB issued ASU 2019-12, which removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The new guidance is effective for public entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, which will require us to adopt these provisions in the first quarter of fiscal 2022. Early adoption is permitted. We anticipate to adopt this update in the first quarter of fiscal 2021 and do not expect the adoption of this guidance to have a material impact in the Consolidated Financial Statements.
17. SUBSEQUENT EVENTS
Revolver Net Borrowings
Subsequent to the quarter end, we amended the revolving credit facility to provide additional liquidity and financial flexibility during the COVID-19 pandemic. Refer to Note 10 - Debt for further details. NaN borrowingsnet payments were drawnmade on the revolving credit facility subsequent to the end of the third quarter of fiscal 2020.facility.
Dividend Suspension
Subsequent to quarter end, our Board of Directors voted to suspend the quarterly cash dividend due to uncertainty surrounding the duration of closures of our dining rooms and other restrictions mandated by state and local governments in response to COVID-19. The Board of Directors will reevaluate the suspension as developments surrounding the
COVID-19 pandemic mature. There is significant uncertainty regarding the future impact of the pandemic on the restaurant industry and the broader US economy.
CARES Act
On March 27, 2020, subsequent to quarter end, President Trump signed the $2.2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act. Among other things, the CARES Act provides for deferrals of employer payroll tax liabilities coupled with an employee retention tax credit, in addition to a variety of other tax measures.
At this time, we plan to amend our U.S. Income Tax Return for the 2018 and 2019 fiscal years in order to claim additional depreciation related to qualified improvement property that will allow us to generate refunds. In addition, the CARES Act allows employers to defer paying their employer portion of the social security payroll tax (6.2 percent) otherwise due. The deferral period started on March 27, 2020 and runs through December 31, 2020. The amounts will ultimately be paid over to Treasury in two installments 1) half of the deferred amount of payroll taxes from 2020 will be due December 31, 2021, and 2) the remaining half due December 31, 2022. We are continuing to evaluate other tax provisions and opportunities this act may provide.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 thirty-nine week periods ended March 25,September 23, 2020 and March 27,September 25, 2019, the MD&A should be read in conjunction with the Consolidated Financial Statements (Unaudited) and related Notes to the Consolidated Financial Statements (Unaudited) included in this quarterly report. All amounts within the MD&A are presented in millions unless otherwise specified.
OVERVIEW
We are 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. At March 25,September 23, 2020, we owned, operated or franchised 1,6751,660 restaurants, consisting of 1,1171,116 Company-owned restaurants and 558544 franchised restaurants, located in the United States, 2928 countries and two United States territories. Our two restaurant brands, Chili’s and Maggiano’s, are both operating segments and reporting units. Our Chili’s and Maggiano’s locations support our virtual brand offering, It’s Just Wings™ through our partnership with DoorDash.
Pre-COVID-19 PerformanceCOVID-19 Pandemic
InImpact of COVID-19 Pandemic
The COVID-19 global pandemic caused a significant decrease in sales during the third and fourth quarters of fiscal 2020, continuing into the first quarter of fiscal 2021. At the end of the third quarter of fiscal 2020, we temporarily closed all Company-owned restaurant dining and banquet rooms as we transitioned to an off-premise business model and temporarily delayed our multi-yearexpansion plans. During the fourth quarter of fiscal 2020, beginning on April 27, 2020, we began to reopen certain dining room locations as permitted by state and local governments. At the end of the first quarter of fiscal 2021, September 23, 2020, substantially all of our Company-owned restaurant dining and banquet rooms or patios were open in a limited capacity.
As dining rooms have reopened, we have mandatory table distancing as an added safety measure for our guests. In addition, we have increased our already strict sanitation requirements, are conducting daily health and temperature checks for all employees before they begin their shift and are requiring personal protective equipment to be worn by all restaurant employees at all times. Our priority has been protecting the health and safety of team members and guests while continuing to serve our communities.
As a result of COVID-19, we have experienced a negative impact on our revenues and traffic. At this time, the impact of COVID-19, in both the short term and long term, is difficult to estimate due to the uncertainty about the duration of the pandemic, the discovery of any effective treatments, cures or vaccines and the related government restrictions. Additional impacts to the business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which COVID-19 may impact our business, including the capacity of our dining rooms, what operational restrictions may be imposed, and our ability to fully staff reopened dining rooms. As such, we have taken a number of proactive measures to adapt our business to lower demand levels during the COVID-19 pandemic including measures to significantly reduce costs, partnering with our lenders to provide additional liquidity, issuing additional common stock and negotiating rent concessions with landlords. We continue to closely monitor and adapt to the evolving situation.
Operations Strategy
We are committed to strategies were delivering comparable restaurantand a Company culture that we believe are centered on a guest experience. This includes bringing guests back safely, growing long-term sales growth.and profit, engaging team members and working to return our business to pre-pandemic levels. Our strategies and culture are intended to differentiate our brands from the competition, effectively and efficiently manage our restaurants and establish a lasting presence for our brands in key markets around the world.
Our primary strategy remains to make our guests feel special through great food and quality service so that they return to our restaurants. Our guest survey scores on food quality and service reached an all-time high last year and continued to improve during the pandemic as we continued to provide great food and service. Our enhanced safety training and systems have also created a safer environment for our team and guests.
Guest Engagement Through March 8,Technology - We have invested in our technology and off-premise options as more guests are opting for to-go and delivery. Our to-go menu is available through our Chili’s mobile app, on our Chili’s and Maggiano’s brand websites, our exclusive delivery partner DoorDash, or by calling the restaurant. Since fiscal 2018, our off-premise business has grown by 177%. Chili’s exclusive partnership with DoorDash is instrumental in connecting with our guests and providing convenience especially during the COVID-19 pandemic. DoorDash orders are sent directly into our point of sale system which has created a streamlined integration to our kitchens. We believe that guests will continue to prefer more convenience and off-premise options after the pandemic concerns dissipate. We plan to continue investing in our technology systems to support our carryout and delivery capabilities.
In dining rooms we use tabletop devices to engage our guests at the table. In fiscal 2020, Company-ownedwe rolled out a new tabletop device to continue to enhance this experience. These devices provide pay at the table, reordering, digital entertainment, guest feedback and support our My Chili’s comparable restaurant sales had increased by 3.3%, and Company-owned Maggiano’s comparable restaurant sales had increased by 0.6%. At Chili’s, our value offerings andRewards program. My Chili’s Rewards loyalty program helped drive positive traffic.database includes more than 8 million loyal members who have interacted with Chili’s in the previous six months. We customize offerings for our guests based on their purchase behavior, and we continue to shift more of our overall marketing spend to these customized channels and promotions. We believe this strategy gives us a sustained competitive advantage over independent restaurants and the majority of our competitors.
Chili’s - Chili’s continues to outpace the casual dining industry and grow market share. Part of our strategy is to differentiate Chili’s from our competitors with a flexible platform of value offerings at both lunch and dinner as well as connecting with our guests through our My Chili’s Rewards loyalty program. Our Cheers to Patron® Margarita of the Month and new offerings on our 3 for $10 meal platform were particularly successful in bringing guests back to Chili’s. Our Chili’s off-premise sales, which includes both to-go and delivery, also grew and reached approximately 20% of sales, with approximately 14% coming from to-go and 6% from delivery. Membership in the My Chili’s Rewards loyalty program also continued to grow. While the spread of the novel strain of coronavirus (“COVID-19”) dramatically changed the full-quarter results, we believe these intra-quarter results are further evidence and provide a good foundation for our brands as they move forward our multi-year strategies.
We believe the impact of COVID-19 will not be long-term, and therefore we are committed to our strategies and initiatives that we believe will deliver long-term results.
Impact of COVID-19 Pandemic
COVID-19 caused a dramatic decrease in guest traffic and sales during the last three weeks of the third quarter of fiscal 2020 as it became a global pandemic. We temporarily closed all restaurant dining and banquet rooms as we transitioned to a 100% off-premise model by the end of the third quarter of fiscal 2020. Our priority became protecting the health and safety of team members and guests while continuing to serve our communities. We also took a number of proactive measures to adapt our business to lower demand levels during the COVID-19 pandemic and to reduce the amount of cash lost during the COVID-19 pandemic.
Both Chili’s and Maggiano’s are able to serve our guests during the COVID-19 pandemic as a result of our strategic decision to invest in technology, training and partnerships that enable online ordering, mobile app ordering, curbside service and third-party delivery. As a result, our off-premise sales have grown significantly during the COVID-19 pandemic. Off-premise sales have grown each week since the COVID-19 pandemic, and have captured 57% of prior year Company sales during the week ended April 15, 2020, adjusted to exclude the Midwest region acquisition that occurred in the first quarter of fiscal 2020.
We have been carefully assessing the effect of COVID-19 on our business as conditions continue to evolve throughout the communities we serve. At this time, the impact of COVID-19 in both the short term and long term is difficult to estimate due to the uncertainty about the spread of the virus, the discovery of cures or vaccines and the duration of government restrictions. As a result of COVID-19, we expect a material adverse impact on our revenues, results of operations and cash flows in the fourth quarter of fiscal 2020 and potentially into fiscal 2021. The situation is rapidly
changing and additional impacts to the business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which COVID-19 will change our business, including when our dining rooms will reopen, what operational restrictions may be imposed, our ability to staff reopened dining rooms, and whether customers will re-engage with our brands. As such, we have taken measures to significantly reduce costs, and partnered with our lenders to provide additional liquidity. Refer to “COVID-19 Impact on Liquidity” section below for further details. We continue to closely monitor and adapt to the evolving situation.
Operations Strategy
We are committed to strategies and a Company culture that we believe are centered on a guest experience which includes bringing back guests, growing long-term sales and profit and engaging team members. Our strategies and culture are intended to differentiate our brands from the competition, reduce the costs associated with managing our restaurants and establish a strong presence for our brands in key markets around the world. Aligning to our strategy, in the first quarter of fiscal 2020, we acquired 116 Midwest Chili’s restaurants from a franchise partner.
Our primary strategy remains to make our guests feel special through great food and quality service so that they return to our restaurants. At the end of the second quarter of fiscal 2020, our internal rankings on food quality and service reached an all-time high and our social ratings, as measured by Google, have been improving faster than our casual dining competitors.
Part of our strategy is to differentiate Chili’s from our competitors with a flexible platform of value offerings at both lunch and dinner, and we are committed to offering consistent, quality products at a price point that is compelling to our guests. Our “3 for $10” platform allows guests to combine a starter, a non-alcoholic drink and an entrée for just $10.00 and isas part of the every-day base menu. Additionally, we have continued our Margarita of the Month promotion that started in fiscal 2018 that features a premium-liquor margarita every month at an every-day value price of $5.00. InMost of our value propositions are available for guests to enjoy in our dining rooms or off-premise.
Chili’s off-premise dining options including our virtual brand, It’s Just Wings are a critical part of our strategy going forward. Chili’s off-premise sales, including both to-go and delivery, is approximately 48% of sales, with approximately 61% coming from to-go and 39% from delivery during the first half of fiscal 2020, we continued to see an increase in popularity of both 3 for $10 and Margarita of the Month, helping us increase frequency of loyal guests and win new ones.
We have also invested in our off-premise business to provide convenient technology and off-premise options as more guests are opting for to-go and delivery. Since fiscal 2018, our off-premise business has grown by 67%, faster than most of our competitors. Fiscal 2020 will be the first full year of Chili’s exclusive partnership with DoorDash for third party delivery to our guests. This partnership is proving even more instrumental in offering our guests continued service during the COVID-19 pandemic. In partnership with DoorDash, we leveraged technology so that DoorDash orders are sent directly into our point of sale system, creating efficiencies and a system that allows us to better serve our guests. We believe that guests will continue to prefer more convenience and options that allow them to eat off-premise, and we plan to continue investments in our technology systems and carryout and delivery capabilities.
We also believe our digital guest experience will help us engage our guests more effectively. Our My Chili’s Rewards loyalty database, as of the end of the third quarter of fiscal 2020, includes more than 8 million loyal members who have interacted with2021. We regularly evaluate our processes and menu at Chili’s in the previous six months.to identify opportunities where we can improve our service quality and
food. We use tabletop devices to engage our guests at the table, and in fiscal 2020 we began rolling out a new tabletop device to continue to enhance this experience. We customize offerings forfocus on our guests based on their purchase behavior,core equities and we continue to shift moreimproving guest satisfaction with our food and service by improving execution of our overall marketing spend to these customized channels and promotions. We expect this strategy to give us a sustained competitive advantage over independent restaurants and the majority ofoperations standards.
Maggiano’s - At Maggiano’s, we believe our competitors.
We believe that improvements at our domestic Chili’s will have a significant impactfocus on the business; however, our results will also benefit through additional contributions from Maggiano’s and our global Chili’s franchise business. Maggiano’s has focused on execution of operating fundamentals to improve service and foodtechnology will provide the foundation for its guests. In fiscal 2020, Maggiano’s also began testing electronic check presenters that facilitate a pay-at-the-table option to provide conveniencefuture efficiencies and efficiency to guests and to increase digital guest engagement.growth. Maggiano’s also has an exclusive partnership with DoorDash. Our exclusive partnership creates a more affordable rate structure, making third party delivery more sustainable and efficient for the brand to operate. In the second quarter of fiscal 2020, ourOur guests were givenhave the ability to order delivery directly through ourthe Maggiano’s website, in addition fromto the DoorDash platforms. In fiscal 2019, Maggiano’s opened its first franchise location
Virtual Opportunities - It’s Just Wings, a virtual brand offering, launched on June 23, 2020 and is available only through DoorDash delivery. This platform allows us to leverage our existing infrastructure, while adding minimal complexity in the Dallas Fort Worth International Airport. Progressrestaurants. It’s Just Wings is a no-frills offering that consists of chicken wings available in 11 different sauces and rubs, curly fries, ranch dressing and fried Oreos for a second franchise airport location has been made.value price. We will continue to identify opportunities to drive restaurant growth by utilizing our existing restaurant infrastructure and DoorDash partnership.
Our global franchisees continue to grow the Chili’s brand around the world, opening 23four restaurants and entering into one new development agreement in the first thirty-nine weeksquarter of fiscal 2020, including our first Chili’s restaurant in Vietnam.2021. We plan to strategically pursue expansion of Chili’s internationally through development agreements with new and existing franchise partners. During the COVID-19 pandemic,We are supporting our franchise partners have experienced similar regulated closures both domestically and globally. We have partnered with our domestic and global franchiseesopportunities to offer flexibility to help provide liquidity relief during this time.expand sales through the It’s Just Wings virtual brand.
Company Development -The following table details the number of restaurant openings during the thirteen and thirty-nine week periods ended March 25,September 23, 2020 and March 27,September 25, 2019, respectively, total full year projected openings in fiscal 2020,2021, and the total restaurants open at each period end:
|
| | | | | | | | | | | | | | | | | | | | |
| Openings During the | | Openings During the | | Full Year Projected Openings | | |
| Thirteen Week Periods Ended | | Thirty-Nine Week Periods Ended | | | Total Open Restaurants at |
| March 25, 2020 | | March 27, 2019 | | March 25, 2020 | | March 27, 2019 | | Fiscal 2020 | | March 25, 2020 | | March 27, 2019 |
Company-owned restaurants | | | | | | | | | | | | | |
Chili’s domestic | 1 |
| | 2 |
| | 6 |
| | 2 |
| | 6 |
| | 1,060 |
| | 940 |
|
Chili’s international | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
|
Maggiano’s | — |
| | — |
| | — |
| | — |
| | — |
| | 52 |
| | 52 |
|
Total Company-owned | 1 |
| | 2 |
| | 6 |
| | 2 |
| | 6 |
| | 1,117 |
| | 997 |
|
Franchise restaurants | | | | | | | | | | | | | |
Chili’s domestic | — |
| | 1 |
| | 2 |
| | 4 |
| | 2 |
| | 178 |
| | 308 |
|
Chili’s international | 7 |
| | 4 |
| | 23 |
| | 14 |
| | 23 |
| | 379 |
| | 370 |
|
Maggiano’s | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | 1 |
|
Total franchise | 7 |
| | 5 |
| | 25 |
| | 19 |
| | 25 |
| | 558 |
| | 679 |
|
Total restaurants | | | | | | | | | | | | | |
Chili’s domestic | 1 |
| | 3 |
| | 8 |
| | 6 |
| | 8 |
| | 1,238 |
| | 1,248 |
|
Chili’s international | 7 |
| | 4 |
| | 23 |
| | 14 |
| | 23 |
| | 384 |
| | 375 |
|
Maggiano’s | — |
| | — |
| | — |
| | 1 |
| | — |
| | 53 |
| | 53 |
|
Total | 8 |
| | 7 |
| | 31 |
| | 21 |
| | 31 |
| | 1,675 |
| | 1,676 |
|
During the thirty-nine week period ended March 25, 2020, we acquired 116 Chili’s restaurants located in the Midwest United States previously owned by a franchisee. The acquisition of these restaurants is not reflected in Openings during the thirteen and thirty-nine week periods ended March 25, 2020 or Full Year Projected Openings total as they are existing restaurant locations transitioning ownership. These acquired restaurants are included in Total Open Restaurants at March 25, 2020 within the total for Company-owned restaurants Chili’s domestic.
Also included | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Openings During the | | Full Year Projected Openings | | |
| | | Thirteen Week Periods Ended | | | Total Open Restaurants at |
| | | | | September 23, 2020 | | September 25, 2019 | | Fiscal 2021 | | September 23, 2020 | | September 25, 2019 |
Company-owned restaurants | | | | | | | | | | | | | |
Chili’s domestic | | | | | 3 | | | 1 | | | 8 | | | 1,059 | | | 1,061 | |
Chili’s international | | | | | — | | | — | | | — | | | 5 | | | 5 | |
Maggiano’s domestic | | | | | — | | | — | | | — | | | 52 | | | 52 | |
Total Company-owned | | | | | 3 | | | 1 | | | 8 | | | 1,116 | | | 1,118 | |
Franchise restaurants | | | | | | | | | | | | | |
Chili’s domestic | | | | | 1 | | | 1 | | | 3 | | | 172 | | | 180 | |
Chili’s international | | | | | 3 | | | 11 | | | 6-9 | | 371 | | | 373 | |
Maggiano’s domestic | | | | | — | | | — | | | 1 | | | 1 | | | 1 | |
Total franchise | | | | | 4 | | | 12 | | | 10-13 | | 544 | | | 554 | |
Total restaurants | | | | | | | | | | | | | |
Chili’s domestic | | | | | 4 | | | 2 | | | 11 | | | 1,231 | | | 1,241 | |
Chili’s international | | | | | 3 | | | 11 | | | 6-9 | | 376 | | | 378 | |
Maggiano’s domestic | | | | | — | | | — | | | 1 | | | 53 | | | 53 | |
Total | | | | | 7 | | | 13 | | | 18-21 | | 1,660 | | | 1,672 | |
Included in the Total Restaurants Open at March 25,September 23, 2020 are locations that were temporarily closed due to the COVID-19 pandemic which included: 10four Company-owned Chili’s restaurants, located within a closed structure or closed due to local regulations, 32seven domestic Chili’s franchise locations, 203and 27 Chili’s international franchise locations, and 1 Maggiano’s franchise location.locations. Additionally, during this COVID-19 pandemic with the various government restrictions,first quarter of fiscal 2021, we have temporarily delayedresumed construction of new restaurants until we are able to safely resume.and opened three Chili’s domestic locations.
Relocations are not included in the table above. During the thirty-ninethirteen week period ended March 25,September 23, 2020 we have not relocated anyone Company-owned restaurants,restaurant, and we do not plan to relocate anyone Chili’s domestic Company-owned restaurantsrestaurant during the remainder of fiscal 2020.2021.
At March 25,September 23, 2020, we own property for 4342 of the 1,1171,116 Company-owned restaurants. The relatednet book values associated with these restaurants included land of $34.1$33.1 million and buildings of $15.1$13.0 million.
RESULTS OF OPERATIONS
The following table sets forth selected operating data as a percentage of Total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying Consolidated Statements of Comprehensive Income (Unaudited):
|
| | | | | | | | | | | |
| Thirteen Week Periods Ended | | Thirty-Nine Week Periods Ended |
| March 25, 2020 | | March 27, 2019 | | March 25, 2020 | | March 27, 2019 |
Revenues | | | | | | | |
Company sales | 97.7 | % | | 96.7 | % | | 97.5 | % | | 96.5 | % |
Franchise and other revenues | 2.3 | % | | 3.3 | % | | 2.5 | % | | 3.5 | % |
Total revenues | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Operating costs and expenses | | | | | | | |
Company restaurants (excluding depreciation and amortization) | | | | | | | |
Food and beverage costs(1) | 27.0 | % | | 26.7 | % | | 26.7 | % | | 26.4 | % |
Restaurant labor(1) | 34.0 | % | | 33.8 | % | | 34.5 | % | | 34.4 | % |
Restaurant expenses(1) | 26.2 | % | | 25.2 | % | | 26.6 | % | | 26.5 | % |
Company restaurant expenses(1) | 87.2 | % | | 85.7 | % | | 87.8 | % | | 87.3 | % |
Depreciation and amortization | 5.1 | % | | 4.3 | % | | 4.8 | % | | 4.6 | % |
General and administrative | 2.7 | % | | 4.9 | % | | 3.8 | % | | 4.6 | % |
Other (gains) and charges | 2.2 | % | | (0.4 | )% | | 1.2 | % | | (0.5 | )% |
Total operating costs and expenses | 95.2 | % | | 91.6 | % | | 95.4 | % | | 93.0 | % |
Operating income | 4.8 | % | | 8.4 | % | | 4.6 | % | | 7.0 | % |
Interest expenses | 1.7 | % | | 1.9 | % | | 1.8 | % | | 2.0 | % |
Other (income), net | (0.1 | )% | | (0.1 | )% | | (0.1 | )% | | (0.1 | )% |
Income before provision for income taxes | 3.2 | % | | 6.6 | % | | 2.9 | % | | 5.1 | % |
Provision (benefit) for income taxes | (0.4 | )% | | 0.7 | % | | 0.0 | % | | 0.6 | % |
Net income | 3.6 | % | | 5.9 | % | | 2.9 | % | | 4.5 | % |
| | | | | | | | | | | | | | | |
| | | Thirteen Week Periods Ended |
| | | | | September 23, 2020 | | September 25, 2019 |
Revenues | | | | | | | |
Company sales(1) | | | | | 98.4 | % | | 97.2 | % |
Franchise and other revenues(1) | | | | | 1.6 | % | | 2.8 | % |
Total revenues(1) | | | | | 100.0 | % | | 100.0 | % |
Operating costs and expenses | | | | | | | |
Food and beverage costs(2) | | | | | 26.6 | % | | 26.7 | % |
Restaurant labor(2) | | | | | 34.0 | % | | 35.2 | % |
Restaurant expenses(2) | | | | | 27.8 | % | | 27.1 | % |
Depreciation and amortization(1) | | | | | 5.1 | % | | 4.8 | % |
General and administrative(1) | | | | | 4.1 | % | | 4.8 | % |
Other (gains) and charges(1) | | | | | 0.5 | % | | (0.1) | % |
Total operating costs and expenses(1) | | | | | 96.7 | % | | 96.0 | % |
Operating income(1) | | | | | 3.3 | % | | 4.0 | % |
Interest expenses(1) | | | | | 2.0 | % | | 1.9 | % |
Other (income), net(1) | | | | | (0.1) | % | | 0.0 | % |
Income before income taxes(1) | | | | | 1.4 | % | | 2.1 | % |
Provision (benefit) for income taxes(1) | | | | | 0.0 | % | | 0.2 | % |
Net income(1) | | | | | 1.4 | % | | 1.9 | % |
(1)As a percentage of Company sales.Total revenues
(2)As a percentage of Company sales Revenues
Thirteen and Thirty-Nine Week PeriodsPeriod Ended March 25,September 23, 2020 compared to March 27,September 25, 2019
Revenues are presented in two separate captions in the Consolidated Statements of Comprehensive Income (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 sales made with gift card redemptions.
•Franchise and other revenues include Royalties and Franchise fees and other revenues. Franchise fees and other revenues include delivery service income, gift card breakage, franchise advertising fees, digital entertainment revenues, franchise and development fees, Maggiano’s banquet service charge income, gift card breakage, gift card equalization, merchandise income, and gift card discount costs from third-party gift card sales, advertising fees, digital entertainment revenues, delivery fee income, franchise and development fees, merchandise income, and retail royalty revenues.
sales.
The following is a summary of the change in Total revenues:
| | | | | | | | | | | | | | | | | |
| Total Revenues |
| Chili’s | | Maggiano’s | | Total Revenues |
Thirteen Week Period Ended September 25, 2019 | $ | 695.6 | | | $ | 90.4 | | | $ | 786.0 | |
Change from: | | | | | |
Comparable restaurant sales(1) | (46.9) | | | (33.2) | | | (80.1) | |
Restaurant openings | 4.1 | | | — | | | 4.1 | |
Restaurant relocations | 0.4 | | | — | | | 0.4 | |
Restaurant closings(2) | (9.8) | | | — | | | (9.8) | |
Restaurant acquisitions(3) | 49.7 | | | — | | | 49.7 | |
| | | | | |
Company sales | (2.5) | | | (33.2) | | | (35.7) | |
Royalties(4) | (5.2) | | | (0.1) | | | (5.3) | |
Franchise fees and other revenues | (1.4) | | | (3.5) | | | (4.9) | |
Franchise and other revenues | (6.6) | | | (3.6) | | | (10.2) | |
Thirteen Week Period Ended September 23, 2020 | $ | 686.5 | | | $ | 53.6 | | | $ | 740.1 | |
|
| | | | | | | | | | | |
| Total Revenues |
| Chili’s | | Maggiano’s | | Total Revenues |
Thirteen Week Period Ended March 27, 2019 | $ | 732.7 |
| | $ | 106.6 |
| | $ | 839.3 |
|
Change from: | | | | | |
Restaurant closings(1) | (3.7 | ) | | — |
| | (3.7 | ) |
Restaurant openings | 7.8 |
| | — |
| | 7.8 |
|
Restaurant relocations | (0.2 | ) | | — |
| | (0.2 | ) |
Restaurant acquisitions(2) | 72.0 |
| | — |
| | 72.0 |
|
Comparable restaurant sales(3) | (37.0 | ) | | (10.1 | ) | | (47.1 | ) |
Company sales | 38.9 |
| | (10.1 | ) | | 28.8 |
|
Royalties(4) | (4.0 | ) | | — |
| | (4.0 | ) |
Franchise fees and other revenues | (3.2 | ) | | (0.9 | ) | | (4.1 | ) |
Franchise and other revenues | (7.2 | ) | | (0.9 | ) | | (8.1 | ) |
Thirteen Week Period Ended March 25, 2020 | $ | 764.4 |
| | $ | 95.6 |
| | $ | 860.0 |
|
(1)Comparable restaurant sales decreased due to lower dining room guest traffic resulting from capacity limitations and personal safety preferences, partially offset by increased off-premise sales.(2)Restaurant closings include the impact of permanently closed locations and temporary COVID-19 closures, that have extended past 14 consecutive days. |
| | | | | | | | | | | |
| Total Revenues |
| Chili’s | | Maggiano’s | | Total Revenues |
Thirty-Nine Week Period Ended March 27, 2019 | $ | 2,056.8 |
| | $ | 327.0 |
| | $ | 2,383.8 |
|
Change from: | | | | | |
Restaurant closings(1) | (7.6 | ) | | — |
| | (7.6 | ) |
Restaurant openings | 17.1 |
| | — |
| | 17.1 |
|
Restaurant relocations | 0.5 |
| | — |
| | 0.5 |
|
Restaurant acquisitions(2) | 158.2 |
| | — |
| | 158.2 |
|
Comparable restaurant sales(3) | (4.3 | ) | | (13.5 | ) | | (17.8 | ) |
Company sales | 163.9 |
| | (13.5 | ) | | 150.4 |
|
Royalties(4) | (8.4 | ) | | 0.1 |
| | (8.3 | ) |
Franchise fees and other revenues | (9.2 | ) | | (1.4 | ) | | (10.6 | ) |
Franchise and other revenues | (17.6 | ) | | (1.3 | ) | | (18.9 | ) |
Thirty-Nine Week Period Ended March 25, 2020 | $ | 2,203.1 |
| | $ | 312.2 |
| | $ | 2,515.3 |
|
(3)We acquired 116 Chili’s restaurants from a franchisee effective September 5, 2019. This amount represents the change in Company sales attributed to owning these restaurants over the entire thirteen week period ended September 23, 2020. | |
(1)
| Restaurant closings include the impact of permanently closed locations. During certain times restaurants may be temporarily closed, such as during weather or significant maintenance events. Results of temporarily closed restaurants are included in the Comparable restaurant sales category. |
| |
(2)
| Effective September 5, 2019, we acquired 116 Midwest Chili’s restaurants from a franchisee. The revenues from these restaurants are now included in Company sales for the thirteen week period ended March 25,(4)Lower royalties in the thirteen week period ended September 23, 2020 and the twenty-nine week period owned during the thirty-nine week period ended March 25, 2020. |
| |
(3)
| Comparable restaurant sales decreased due to the COVID-19 pandemic that impacted restaurant traffic from the temporary dining room closures, partially offset by increased off-premise traffic as we moved to a 100% off-premise model by the end of the third quarter of fiscal 2020. |
| |
(4)
| Royalties are based on franchise sales. Our franchisees generated approximately $218.0 million and $742.6 million in sales for the thirteen and thirty-nine week periods ended March 25, 2020, respectively, compared to $335.0 million and $982.7 million in sales for the thirteen and thirty-nine week periods ended March 27, 2019, respectively. Lower royalties in the fiscal 2020 periods are primarily due to the acquisition of 116 Chili’s restaurants from a franchisee in the first quarter of fiscal 2020 and the adverse impact of the COVID-19 |
pandemic on our domestic and global franchise restaurants. We have offered our franchise partners deferred payment terms on royalty and marketing related fees during this COVID-19 pandemic. Our franchisees generated sales of approximately $164.0 million for the thirteen week period ended September 23, 2020 compared to $298.3 million in sales for the thirteen week period ended September 25, 2019.
The table below presents the percentage change in comparable restaurant sales and restaurant capacity for the thirteen week period ended September 23, 2020 compared to September 25, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Percentage Change in the Thirteen Week Period Ended September 23, 2020 versus September 25, 2019 |
| Comparable Restaurant Sales(1)(2) | | Price Impact | | Mix-Shift(3) | | Traffic | | Restaurant Capacity(4) |
Company-owned | (10.9) | % | | 0.4 | % | | (6.3) | % | | (5.0) | % | | 7.8 | % |
Chili’s | (7.2) | % | | 0.2 | % | | (4.2) | % | | (3.2) | % | | 8.2 | % |
Maggiano’s | (38.6) | % | | 3.0 | % | | (12.7) | % | | (28.9) | % | | 0.0 | % |
Chili’s Franchise(5) | (11.5) | % | | | | | | | | |
U.S. | (5.6) | % | | | | | | | | |
International | (21.9) | % | | | | | | | | |
Chili’s Domestic(6) | (7.0) | % | | | | | | | | |
System-wide(7) | (11.0) | % | | | | | | | | |
(1)Comparable Restaurant Sales include all restaurants that have been in operation for more than 18 months except acquired restaurants which are included after 12 months of ownership. 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)Comparable Restaurant Sales for Chili’s and Restaurant Capacity:Maggiano’s include the results of It’s Just Wings, a virtual brand launched nationally in June 2020.
|
| | | | | | | | | | | | | | |
| Percentage Change in the Thirteen Week Period Ended March 25, 2020 versus March 27, 2019 |
| Comparable Restaurant Sales(1) | | Price Impact | | Mix-Shift(2) | | Traffic | | Restaurant Capacity(3) |
Company-owned(4) | (5.9 | )% | | 1.0 | % | | (0.1 | )% | | (6.8 | )% | | 15.3 | % |
Chili’s(4) | (5.3 | )% | | 0.9 | % | | 0.3 | % | | (6.5 | )% | | 16.1 | % |
Maggiano’s | (9.9 | )% | | 1.8 | % | | (1.5 | )% | | (10.2 | )% | | 0.0 | % |
Chili’s Franchise(4)(5) | (7.7 | )% | | | | | | | | |
U.S.(4) | (6.3 | )% | | | | | | | | |
International | (9.5 | )% | | | | | | | | |
Chili’s Domestic(4)(6) | (5.4 | )% | | | | | | | | |
System-wide(4)(7) | (6.2 | )% | | | | | | | | |
26 |
| | | | | | | | | | | | | | |
| Percentage Change in the Thirty-Nine Week Period Ended March 25, 2020 versus March 27, 2019 |
| Comparable Restaurant Sales(1) | | Price Impact | | Mix-Shift(2) | | Traffic | | Restaurant Capacity(3) |
Company-owned(4) | (0.9 | )% | | 1.3 | % | | 0.3 | % | | (2.5 | )% | | 10.0 | % |
Chili’s(4) | (0.3 | )% | | 1.3 | % | | 0.7 | % | | (2.3 | )% | | 10.6 | % |
Maggiano’s | (4.3 | )% | | 1.5 | % | | (0.5 | )% | | (5.3 | )% | | 0.0 | % |
Chili’s Franchise(4)(5) | (2.4 | )% | | | | | | | | |
U.S.(4) | (1.4 | )% | | | | | | | | |
International | (3.8 | )% | | | | | | | | |
Chili’s Domestic(4)(6) | (0.5 | )% | | | | | | | | |
System-wide(4)(7) | (1.1 | )% | | | | | | | | |
| |
(1)
| Comparable Restaurant Sales include all restaurants that have been in operation for more than 18 months except acquired restaurants which are included after more than 12 months ownership. 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. Chili’s Company-owned Restaurant Capacity increased in fiscal 2020 primarily related to the acquisition of 116 Chili’s restaurants in the first quarter of fiscal 2020. We believe the COVID-19 related restaurant closures are temporary and therefore no adjustment has been made to capacity. |
| |
(4)
| Chili’s Company-owned Comparable Restaurant Sales excludes the impact from the 116 Chili’s restaurants acquired in the first quarter of fiscal 2020. Chili’s Franchise U.S. Comparable Restaurant Sales includes sales from these 116 acquired restaurants until the September 5, 2019 acquisition date. |
| |
(5)
| Chili’s Franchise sales generated by franchisees are not included in revenues in the Consolidated Statements of Comprehensive Income (Unaudited); 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. |
| |
(6)
| 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. |
(3)Mix-Shift is calculated as the year-over-year percentage change in Company sales resulting from the change in menu items ordered by guests.
| |
(4)Restaurant Capacity is measured by sales weeks and is calculated based on comparable periods year-over-year. We believe the COVID-19 related restaurant closures are temporary and therefore no adjustment has been made to capacity. (5)Chili’s franchise sales generated by franchisees are not included in revenues in the Consolidated Statements of Comprehensive Income (Unaudited); however, we generate royalty revenues and advertising fees based on franchisee revenues, where applicable. We believe including Chili’s franchise comparable restaurant sales provides investors information regarding brand performance that is relevant to current operations. (6)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. (7)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. (7)
| 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. |
Costs and Expenses
Thirteen Week Periods Ended March 25,September 23, 2020 compared to March 27,September 25, 2019
The following is a summary of the change in costs and expenses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | (Favorable) Unfavorable Variance |
| September 23, 2020 | | September 25, 2019 | |
| Dollars | | % of Company Sales | | Dollars | | % of Company Sales | | Dollars | | % of Company Sales |
Food and beverage costs | $ | 193.5 | | | 26.6 | % | | $ | 203.8 | | | 26.7 | % | | $ | (10.3) | | | (0.1) | % |
Restaurant labor | 248.0 | | | 34.0 | % | | 268.5 | | | 35.2 | % | | (20.5) | | | (1.2) | % |
Restaurant expenses | 202.5 | | | 27.8 | % | | 207.3 | | | 27.1 | % | | (4.8) | | | 0.7 | % |
Depreciation and amortization | 37.4 | | | | | 38.1 | | | | | (0.7) | | | |
General and administrative | 30.5 | | | | | 38.0 | | | | | (7.5) | | | |
Other (gains) and charges | 3.8 | | | | | (0.9) | | | | | 4.7 | | | |
Interest expenses | 14.6 | | | | | 14.9 | | | | | (0.3) | | | |
Other income, net | (0.4) | | | | | (0.5) | | | | | 0.1 | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | (Favorable) Unfavorable Variance |
| March 25, 2020 | | March 27, 2019 | |
| Dollars | | % of Company sales | | Dollars | | % of Company sales | | Dollars | | % of Company sales |
Food and beverage costs | $ | 226.7 |
| | 27.0 | % | | $ | 216.7 |
| | 26.7 | % | | $ | 10.0 |
| | 0.3 | % |
Restaurant labor | 285.9 |
| | 34.0 | % | | 274.0 |
| | 33.8 | % | | 11.9 |
| | 0.2 | % |
Restaurant expenses | 220.2 |
| | 26.2 | % | | 204.7 |
| | 25.2 | % | | 15.5 |
| | 1.0 | % |
Depreciation and amortization | 43.5 |
| | | | 36.4 |
| | | | 7.1 |
| | |
General and administrative | 23.3 |
| | | | 40.8 |
| | | | (17.5 | ) | | |
Other (gains) and charges | 19.3 |
| | | | (3.5 | ) | | | | 22.8 |
| | |
Interest expenses | 14.3 |
| | | | 15.3 |
| | | | (1.0 | ) | | |
Other (income), net | (0.4 | ) | | | | (0.6 | ) | | | | 0.2 |
| | |
Food and beverage costs, as a percentage of Company sales, increaseddecreased 0.1% consisting of 0.2% of favorable menu item mix and 0.2% of favorable commodity pricing related to produce, partially offset by 0.3% that consisted of 0.4% of unfavorable commodity pricing primarily related to meatdairy and produce and 0.3% of unfavorable menu item mix, partially offset by 0.4% of increased menu pricing.beef.
Restaurant labor, as a percentage of Company sales, increased 0.2%, that primarily consisteddecreased 1.2% consisting of 0.5%1.5% of sales deleverage as a result of COVID-19, 0.2% of higherfavorable hourly labor wage ratesexpenses due to reduced staffing requirements, 1.0% of lower manager compensation, and taxes, 0.2%0.3% of higher employee health insurance expenses and 0.1% oflower other net restaurant labor expenses, partially offset by 0.8%1.6% of lower manager bonus expenses.sales deleverage.
Restaurant expenses, as a percentage ofCompany sales, increased 1.0% that primarily consisted0.7% consisting of 1.0% of sales deleverage as a result of COVID-19, 0.7%3.4% of higher expenses primarily related to delivery fees and supplies in connection with the growth in off-premise sales, and 2.2% of sales deleverage, partially offset by 0.7%2.1% of lower advertising expenses, 1.3% of lower repairs and maintenance expenses, 0.3% of lower utilities expenses, 0.3% of lower credit card fees, and 0.9% of lower other net restaurant expenses.
Depreciation and amortization increased $7.1decreased $0.7 million as follows:
|
| | | |
| Depreciation and amortization |
Thirteen Week Period Ended March 27, 2019 | $ | 36.4 |
|
Change from: | |
Additions for new and existing restaurant assets(1) | 3.9 |
|
Acquisition of franchise restaurants(2) | 2.5 |
|
Corporate assets(3) | 0.3 |
|
Finance leases | 5.7 |
|
Retirements and fully depreciated restaurant assets | (5.3 | ) |
Thirteen Week Period Ended March 25, 2020 | $ | 43.5 |
|
| | | | | |
| Depreciation and Amortization |
Thirteen Week Period Ended September 25, 2019 | $ | 38.1 | |
Change from: | |
Retirements and fully depreciated restaurant assets | (6.4) | |
Additions for existing and new restaurant assets(1) | Additions for new and existing restaurant assets increased primarily related to the Chili’s remodel initiative. |
2.1 | |
Acquisition of Chili’s restaurants(2) | Acquisition of franchise restaurants represents the depreciation and amortization of the assets and finance leases acquired of the 116 Chili’s restaurants in the first quarter of fiscal 2020. |
2.1 | |
(3)Finance leases
| 0.8 | |
Corporate assets primarily related to the new corporate headquarters that opened in the third quarter of fiscal 2019, the previous headquarter assets were fully depreciated and retired at that time. | 0.4 | |
Other | 0.3 | |
Thirteen Week Period Ended September 23, 2020 | $ | 37.4 | |
(1)Additions for existing and new restaurant assets increased primarily related to capital purchases.
40
General and administrative expenseexpensses decreased $17.5$7.5 million aas fs follows:ollows:
|
| | | |
| General and Administrative |
Thirteen Week Period Ended March 27, 2019 | $ | 40.8 |
|
Change from: | |
Performance-based compensation(1) | (10.7 | ) |
Stock-based compensation(2) | (6.3 | ) |
Other | (0.5 | ) |
Thirteen Week Period Ended March 25, 2020 | $ | 23.3 |
|
| | | | | |
| General and Administrative |
Thirteen Week Period Ended September 25, 2019 | $ | 38.0 | |
Change from: | |
Stock-based compensation(1) | Performance-based compensation decreased as the COVID-19 pandemic has negatively impacted business performance metrics. |
(3.2) | |
Defined contribution plan employer expenses(2) | Stock-based compensation decreased(2.6)
| |
Professional fees | primarily related to the acceleration of stock-based compensation(1.3) | |
Payroll-related expenses in the first quarter of fiscal 2020 for retirement eligible executives | (1.1) | |
Travel and the timing of grants. Retirement eligibility results in theentertainment expenses | (0.8) | |
Performance-based compensation being recognized in full upon grant as there is no vesting period. | In fiscal 2019, these expenses were recorded over multiple periods as retirement eligibility requirements were not met until the fourth quarter.1.8 | |
Other | (0.3) | |
Thirteen Week Period Ended September 23, 2020 | $ | 30.5 | |
(1)Stock-based compensation decreased primarily due to the acceleration of stock-based compensation expenses in the first quarter of fiscal 2020 for retirement eligible executives. Prior to fiscal 2021, retirement eligibility resulted in the compensation being recognized in full upon grant as there was no substantive vesting period. In fiscal 2021, the retirement eligible executives received only 20% of their equity as awards with no substantive vesting period. Their remaining 80% of equity granted in fiscal 2021 will be amortized evenly over the three year vesting period.
(2)Defined contribution plan employer expenses decreased due to the suspension of employer matching contributions in May 2020.
Other (gains) and charges consisted of the following (for further details, refer to Note 64 - Other Gains and Charges):
|
| | | | | | | |
| Thirteen Week Periods Ended |
| March 25, 2020 | | March 27, 2019 |
COVID-19 related charges | $ | 16.1 |
| | $ | — |
|
Foreign currency transaction (gain) loss | 2.3 |
| | (0.5 | ) |
Acquisition of franchise restaurants costs, net of (gains) | 1.1 |
| | — |
|
Remodel-related costs | 0.6 |
| | 1.7 |
|
Restaurant closure charges | 0.3 |
| | 0.2 |
|
Corporate headquarters relocation charges | 0.2 |
| | 5.2 |
|
Loss (gain) on sale of assets, net | 0.1 |
| | (6.0 | ) |
Sale leaseback (gain), net of transaction charges | — |
| | (4.3 | ) |
Other | (1.4 | ) | | 0.2 |
|
| $ | 19.3 |
| | $ | (3.5 | ) |
| | | | | | | | | | | |
| Thirteen Week Periods Ended |
| September 23, 2020 | | September 25, 2019 |
Restaurant closure charges | $ | 1.5 | | | $ | 0.2 | |
COVID-19 related charges | 1.2 | | | — | |
Remodel-related costs | 0.2 | | | 0.7 | |
Lease modification gain, net | (0.5) | | | (3.1) | |
| | | |
| | | |
| | | |
| | | |
Other | 1.4 | | | 1.3 | |
| $ | 3.8 | | | $ | (0.9) | |
Interest expenses decreased $1.0$0.3 million consisting of lower average borrowing balances and lower interest rates on our revolving credit facility in the thirteen week period ended March 25,September 23, 2020, partially offset by higher interest expenses related to the new real estate finance leases acquired from the 116 Chili’s restaurant acquisition.
Thirty-Nine Week Period Ended March 25, 2020 compared to March 27, 2019
The following is a summary of the change in Costs and Expenses:
|
| | | | | | | | | | | | | | | | | | | | |
| Thirty-Nine Week Periods Ended | | (Favorable) Unfavorable Variance |
| March 25, 2020 | | March 27, 2019 | |
| Dollars | | % of Company sales | | Dollars | | % of Company sales | | Dollars | | % of Company sales |
Food and beverage costs | $ | 653.6 |
| | 26.7 | % | | $ | 609.5 |
| | 26.4 | % | | $ | 44.1 |
| | 0.3 | % |
Restaurant labor | 846.2 |
| | 34.5 | % | | 791.1 |
| | 34.4 | % | | 55.1 |
| | 0.1 | % |
Restaurant expenses | 652.2 |
| | 26.6 | % | | 609.4 |
| | 26.5 | % | | 42.8 |
| | 0.1 | % |
Depreciation and amortization | 120.9 |
| | | | 109.5 |
| | | | 11.4 |
| | |
General and administrative | 95.9 |
| | | | 110.0 |
| | | | (14.1 | ) | | |
Other (gains) and charges | 30.7 |
| | | | (12.4 | ) | | | | 43.1 |
| | |
Interest expenses | 44.2 |
| | | | 46.3 |
| | | | (2.1 | ) | | |
Other (income), net | (1.4 | ) | | | | (2.2 | ) | | | | 0.8 |
| | |
Food and beverage costs, as a percentage of Company sales, increased 0.3%, that consisted of 0.4% of unfavorable commodity pricing primarily related to produce and meat and 0.3% of unfavorable menu item mix, partially offset by 0.4% of increased menu pricing.
Restaurant labor, as a percentage of Company sales, increased 0.1% that primarily consisted of 0.4% of higher hourly labor wage rates and taxes, partially offset by 0.3% of lower manager bonus expenses.
Restaurant expenses, as a percentage of Company sales, increased 0.1% that primarily consisted of 0.7% of higher expenses primarily related to delivery fees in connection with the growth in off-premise sales and 0.2% of higher rent expenses, partially offset by 0.3% of lower advertising expenses, 0.2% of lower repairs and maintenance expenses and 0.3% of lower other net restaurant expenses.
Depreciation and amortization increased $11.4 million as follows:
|
| | | |
| Depreciation and amortization |
Thirty-Nine Week Period Ended March 27, 2019 | $ | 109.5 |
|
Change from: | |
Additions for new and existing restaurant assets(1) | 14.7 |
|
Acquisition of franchise restaurants(2) | 5.7 |
|
Corporate assets(3) | 1.8 |
|
Finance leases | 7.5 |
|
Retirements and fully depreciated restaurant assets | (18.1 | ) |
Other | (0.2 | ) |
Thirty-Nine Week Period Ended March 25, 2020 | $ | 120.9 |
|
| |
(1)
| Additions for new and existing restaurants increased primarily due to the Chili’s remodel initiative. |
| |
(2)
| Acquisition of franchise restaurants represents the depreciation and amortization of the assets and finance leases acquired of the 116 Chili’s restaurants in the first quarter of fiscal 2020. |
| |
(3)
| Corporate assets primarily related to the new corporate headquarters that opened in the third quarter of fiscal 2019, the previous headquarter assets were fully depreciated and retired at that time. |
General and administrative expenses decreased $14.1 million as follows:
|
| | | |
| General and Administrative |
Thirty-Nine Week Period Ended March 27, 2019 | $ | 110.0 |
|
Change from: | |
Performance-based compensation(1) | (10.8 | ) |
Stock-based compensation(2) | (4.0 | ) |
Professional and legal fees | (1.7 | ) |
Other | 2.4 |
|
Thirty-Nine Week Period Ended March 25, 2020 | $ | 95.9 |
|
| |
(1)
| Performance-based compensation decreased due to the impact on performance from the COVID-19 pandemic reducing the expected payout for fiscal 2020. |
| |
(2)
| Stock-based compensation decreasedprimarily related to the acceleration of stock-based compensation expenses in the first quarter of fiscal 2020 for retirement eligible executives and the timing of grants. Retirement eligibility results in the compensation being recognized in full upon grant as there is no vesting period. In fiscal 2019, these expenses were recorded over multiple periods as retirement eligibility requirements were not met until the fourth quarter.
|
Other (gains) and charges consisted of the following (for further details, refer to Note 6 - Other Gains and Charges):
|
| | | | | | | |
| Thirty-Nine Week Periods Ended |
| March 25, 2020 | | March 27, 2019 |
COVID-19 related charges | $ | 16.1 |
| | $ | — |
|
Restaurant impairment charges | 4.6 |
| | 1.0 |
|
Restaurant closure charges | 3.4 |
| | 4.0 |
|
Acquisition of franchise restaurants costs, net of (gains) | 2.6 |
| | — |
|
Foreign currency transaction (gain) loss | 2.2 |
| | (0.6 | ) |
Remodel-related costs | 2.1 |
| | 4.8 |
|
Corporate headquarters relocation charges | 0.9 |
| | 6.2 |
|
Lease modification net (gain) | (3.1 | ) | | — |
|
Loss (gain) on sale of assets, net | — |
| | (6.8 | ) |
Sale leaseback (gain), net of transaction charges | — |
| | (22.0 | ) |
Other | 1.9 |
| | 1.0 |
|
| $ | 30.7 |
| | $ | (12.4 | ) |
Interest expenses decreased $2.1 million consisting of lower average borrowing balances and lower interest rates on our revolving credit facility in the thirty-nine week period ended March 25, 2020, partially offset by higher interest expenses related to the new real estate finance leases from the acquisition of the 116 Chili’s restaurants on September 5, 2019.
Segment Results
At the end of the first quarter of fiscal 2021 substantially all our Company-owned restaurant dining rooms or patios were open in some capacity. Capacity restrictions related to the ongoing COVID-19 pandemic vary by location due to state and local mandates. These capacity restrictions and personal safety preferences have resulted in lower overall guest traffic and many guests have shifted to our off-premise dining options. This shift has changed the staffing requirements in the restaurants and other expenses associated with off-premise which are noted below.
Chili’s Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Thirteen Week Periods Ended | | Favorable (Unfavorable) Variance | | Variance as percentage |
| | | | | | September 23, 2020 | | September 25, 2019 | | |
Company sales | | | | | | | $ | 675.0 | | | $ | 677.5 | | | $ | (2.5) | | | (0.4) | % |
Royalties | | | | | | | 6.6 | | | 11.8 | | | (5.2) | | | (44.1) | % |
Franchise fees and other revenues | | | | | | | 4.9 | | | 6.3 | | | (1.4) | | | (22.2) | % |
Franchise and other revenues | | | | | | | 11.5 | | | 18.1 | | | (6.6) | | | (36.5) | % |
Total revenues | | | | | | | 686.5 | | | 695.6 | | | (9.1) | | | (1.3) | % |
| | | | | | | | | | | | | |
Food and beverage costs | | | | | | | 180.8 | | | 182.4 | | | 1.6 | | | 0.9 | % |
Restaurant labor | | | | | | | 228.2 | | | 233.1 | | | 4.9 | | | 2.1 | % |
Restaurant expenses | | | | | | | 181.4 | | | 180.8 | | | (0.6) | | | (0.3) | % |
Depreciation and amortization | | | | | | | 30.6 | | | 30.7 | | | 0.1 | | | 0.3 | % |
General and administrative | | | | | | | 5.4 | | | 9.1 | | | 3.7 | | | 40.7 | % |
Other (gains) and charges | | | | | | | 3.6 | | | (1.6) | | | (5.2) | | | 325.0 | % |
Total operating costs and expenses | | | | | | | 630.0 | | | 634.5 | | | 4.5 | | | 0.7 | % |
Operating income (loss) | | | | | | | $ | 56.5 | | | $ | 61.1 | | | $ | (4.6) | | | (7.5) | % |
Operating income as a percentage of Total revenues | | | | | | | 8.2 | % | | 8.8 | % | | (0.6) | % | | (6.8) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended |
| Favorable (Unfavorable) Variance |
| Thirty-Nine Week Periods Ended |
| Favorable (Unfavorable) Variance |
| March 25, 2020 |
| March 27, 2019 |
|
| March 25, 2020 |
| March 27, 2019 |
|
Company sales | $ | 748.7 |
|
| $ | 709.8 |
|
| $ | 38.9 |
|
| $ | 2,154.6 |
| | $ | 1,990.7 |
|
| $ | 163.9 |
|
Royalties | 9.4 |
|
| 13.4 |
|
| (4.0 | ) |
| 31.1 |
| | 39.5 |
|
| (8.4 | ) |
Franchise fees and other revenues | 6.3 |
|
| 9.5 |
|
| (3.2 | ) |
| 17.4 |
| | 26.6 |
|
| (9.2 | ) |
Franchise and other revenues | 15.7 |
| | 22.9 |
| | (7.2 | ) | | 48.5 |
| | 66.1 |
| | (17.6 | ) |
Total revenues | 764.4 |
|
| 732.7 |
|
| 31.7 |
|
| 2,203.1 |
| | 2,056.8 |
|
| 146.3 |
|
| | | | | |
|
| |
|
|
|
Company restaurant expenses(1) | 648.4 |
|
| 604.1 |
|
| (44.3 | ) |
| 1,885.0 |
| | 1,734.3 |
|
| (150.7 | ) |
Depreciation and amortization | 36.5 |
|
| 29.8 |
|
| (6.7 | ) |
| 99.3 |
| | 89.8 |
|
| (9.5 | ) |
General and administrative | 5.9 |
|
| 10.5 |
|
| 4.6 |
|
| 23.5 |
| | 28.4 |
|
| 4.9 |
|
Other (gains) and charges | 14.9 |
|
| (3.0 | ) |
| (17.9 | ) |
| 23.9 |
| | (13.9 | ) |
| (37.8 | ) |
Total operating costs and expenses | 705.7 |
|
| 641.4 |
|
| (64.3 | ) |
| 2,031.7 |
| | 1,838.6 |
|
| (193.1 | ) |
Operating income (loss) | $ | 58.7 |
|
| $ | 91.3 |
|
| $ | (32.6 | ) |
| $ | 171.4 |
| | $ | 218.2 |
|
| $ | (46.8 | ) |
Operating income as a percentage of Total revenues | 7.7 | % | | 12.5 | % | | (4.8 | )% | | 7.8 | % | | 10.6 | % | | (2.8 | )% |
| |
(1)
| Company restaurant expenses include Food and beverage costs, Restaurant labor, and Restaurant expenses, including advertising expenses. |
Thirteen Week Period Ended March 25,September 23, 2020 compared to March 27,September 25, 2019
Chili’s Total revenues increaseddecreased by 4.3%1.3% primarily due to lower dining room guest traffic, partially offset by increased off-premise sales including It’s Just Wings and the acquisition of 116 Chili’s restaurants in the first quarter of fiscal 2020 and increased off-premise sales as we transitioned to a 100% off-premise model by the end of the third quarter of fiscal 2020. These increases were partially offset by 5.3% lower comparable restaurant sales driven by reduced dining room traffic and 10 temporarily closed restaurants due to the COVID-19 pandemic.on September 5, 2019. Refer to “Revenues” section above for further details about Chili’s revenues changes.
Company restaurant expenses for Chili’s, as a percentage of Company sales, increased by 1.5% that primarily consisteddecreased 0.5% consisting of 2.3% of lower advertising expenses, 1.5% of sales deleveragelower manager and hourly labor as a result of COVID-19, 0.8%reduced staffing during the first quarter of fiscal 2021, and 1.4% of lower repairs and maintenance expenses. These decreases were partially offset by 2.4% of sales deleverage and 2.3% of higher expenses primarily related to delivery fees and supplies in connection with the growth in off-premise sales, 0.4%sales.
Depreciation and amortization for Chili’s decreased $0.1 million consisting of unfavorable commodity pricing, 0.3% of higher hourly labor wage rates$5.2 million related to fully depreciated assets and taxes, 0.2% of higher employee health insurance expenses, 0.2% of unfavorable other net Company restaurant expenses and 0.1% of unfavorable menu item mix. These increases wereretirements, partially offset by 0.9% of lower manager bonus expenses, 0.7% of lower advertising expenses, and 0.4% of increased menu pricing.
Other (gains) and charges for Chili’s in the thirteen week period ended March 25, 2020 consisted primarily of $13.8$2.1 million of charges related to the COVID-19 pandemic from employee relief paymentsadditional depreciation and inventory spoilage, $1.1 million of costsamortization expenses related to the 116 Chili’s restaurants acquired in the first quarter of fiscal 2020, $1.9 million in existing and $0.6new restaurant additions primarily related to routine capital purchases, $0.9 million in additional amortization expenses related to finance leases, and $0.2 million in other depreciation and amortization expenses increases.
General and administrative for Chili’s decreased $3.7 million consisting primarily of remodel-relateda decrease in defined contribution plan employer expenses, stock-based compensation, payroll-related expenses and professional fees, partially offset by $0.9an increase in performance-based compensation.
Other (gains) and charges for Chili’s in the thirteen week period ended September 23, 2020 consisted primarily of $1.5 million of insurance recoveries.restaurant closure charges and $1.1 million of employee assistance payments and other COVID-19 related expenses. Other (gains) and charges in the thirteen week period ended March 27,September 25, 2019 consisted primarily of $4.3$3.1 million of Sale leasebacklease modification (gain), net of transaction charges, partially offset by $1.7 and $0.5 million of Chili’s remodel write-offs.
Depreciation and amortization for Chili’s increased $6.7 million that primarily consisted of $3.5 million in existing and new restaurant additions mostlynet gain related to the Chili’s remodel initiative, $2.4 million of additional depreciation and amortization expenses related to the acquisition of 116 Chili’s restaurants and $5.4 million in other depreciation and amortization expenses increases, partially offset by $4.6 million related to fully depreciated assets and retirements.
General and administrative for Chili’s decreased $4.6 million that primarily consisted of a decrease in performance-based compensation as the COVID-19 pandemic has negatively impacted business performance metrics.
Thirty-Nine Week Period Ended March 25, 2020 compared to March 27, 2019
Chili’s Total revenues increased 7.1% primarily due to the acquisition of 116 Chili’s restaurantsacquired in the first quarter of fiscal 2020, and increased off-premise sales as we transitioned to a 100% off-premise model by the end of the third quarter of fiscal 2020. These increases were partially offset by 0.3% lower comparable restaurant sales driven by reduced dining room traffic and 10 temporarily closed restaurants due to the COVID-19 pandemic. Refer to “Revenues” section above for further details about Chili’s revenues changes.
Company restaurant expenses for Chili’s, as a percentage of Company sales, increased 0.4% that primarily consisted of 0.7% of higher expenses primarily related to delivery fees in connection with the growth in off-premise sales, 0.5% unfavorable commodity pricing, 0.4% of higher hourly labor wage rates and taxes, and 0.1% of higher employee health insurance expenses. These were offset by 0.5% of lower advertising expenses, 0.4% of increased menu pricing, 0.2% of lower manager bonus expenses and 0.2% of favorable other net Company restaurant expenses.
Other (gains) and charges for Chili’s during the thirty-nine week period ended March 25, 2020 consisted primarily of $13.8 million of charges related to the COVID-19 pandemic from employee relief payments and inventory spoilage, $4.6 million related to restaurant impairments, $3.4 million related to restaurant closure expenses, $2.6 million related to the acquisition of 116 franchised restaurants and $2.1$0.7 million of Chili’s remodel charges, partially offset by a $3.1 million gain on modification of lease liability. Other (gains) and charges for Chili’s during the thirty-nine week period ended March 27, 2019 consisted primarily of $22.0 million net gain from the sale leaseback transactions and $0.8 million of gain on sale of land in Scottsdale, AR and Pensacola, FL, partially offset by $4.8 million restaurant remodel charges, $3.7 million of restaurant closure expenses and $1.0 million related to restaurant impairments.
Depreciation and amortization increased $9.5 million that primarily consisted of $13.5 million in existing and new restaurant additions mostly related to the Chili’s remodel initiative, $6.6 million in other net depreciation and amortization expenses increases, and $5.8 million of additional depreciation and amortization expenses related to the acquisition of 116 Chili’s restaurants. These increases were partially offset by a decrease of $16.4 million related to fully depreciated assets and retirements.
General and administrative decreased $4.9 million that primarily consisted of a $3.4 million decrease in performance-based compensation as the COVID-19 pandemic has negatively impacted business performance metrics, and $1.7 million of payroll-related expenses, partially offset by an increase of $0.3 million of acceleration of certain stock-based compensation expenses for newly retirement eligible executives.
remodel-related costs.
Maggiano’s Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Thirteen Week Periods Ended | | Favorable (Unfavorable) Variance | | Variance as a percentage |
| | | | | | September 23, 2020 | | September 25, 2019 | | |
Company sales | | | | | | | $ | 53.2 | | | $ | 86.4 | | | $ | (33.2) | | | (38.4) | % |
Royalties | | | | | | | — | | | 0.1 | | | (0.1) | | | (100.0) | % |
Franchise fees and other revenues | | | | | | | 0.4 | | | 3.9 | | | (3.5) | | | (89.7) | % |
Franchise and other revenues | | | | | | | 0.4 | | | 4.0 | | | (3.6) | | | (90.0) | % |
Total revenues | | | | | | | 53.6 | | | 90.4 | | | (36.8) | | | (40.7) | % |
| | | | | | | | | | | | | |
Food and beverage costs | | | | | | | 12.7 | | | 21.4 | | | 8.7 | | | 40.7 | % |
Restaurant labor | | | | | | | 19.8 | | | 35.4 | | | 15.6 | | | 44.1 | % |
Restaurant expenses | | | | | | | 20.8 | | | 26.3 | | | 5.5 | | | 20.9 | % |
Depreciation and amortization | | | | | | | 3.6 | | | 4.0 | | | 0.4 | | | 10.0 | % |
General and administrative | | | | | | | 1.3 | | | 1.7 | | | 0.4 | | | 23.5 | % |
Other (gains) and charges | | | | | | | 0.1 | | | 0.1 | | | — | | | — | % |
Total operating costs and expenses | | | | | | | 58.3 | | | 88.9 | | | 30.6 | | | 34.4 | % |
Operating income (loss) | | | | | | | $ | (4.7) | | | $ | 1.5 | | | $ | (6.2) | | | (413.3) | % |
Operating income as a percentage of Total revenues | | | | | | | (8.8) | % | | 1.7 | % | | (10.5) | % | | (617.6) | % |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | Favorable (Unfavorable) Variance | | Thirty-Nine Week Periods Ended | | Favorable (Unfavorable) Variance |
| March 25, 2020 | | March 27, 2019 | | | March 25, 2020 | | March 27, 2019 | |
Company sales | $ | 91.7 |
| | $ | 101.8 |
| | $ | (10.1 | ) | | $ | 297.2 |
| | $ | 310.7 |
| | $ | (13.5 | ) |
Royalties | 0.1 |
| | 0.1 |
| | 0.0 |
| | 0.2 |
| | 0.1 |
| | 0.1 |
|
Franchise fees and other revenues | 3.8 |
| | 4.7 |
| | (0.9 | ) | | 14.8 |
| | 16.2 |
| | (1.4 | ) |
Franchise and other revenues | 3.9 |
| | 4.8 |
| | (0.9 | ) | | 15.0 |
| | 16.3 |
| | (1.3 | ) |
Total revenues | 95.6 |
| | 106.6 |
| | (11.0 | ) | | 312.2 |
| | 327.0 |
| | (14.8 | ) |
| | | | | | | | | | | |
Company restaurant expenses(1) | 84.3 |
| | 91.2 |
| | 6.9 |
| | 266.6 |
| | 275.2 |
| | 8.6 |
|
Depreciation and amortization | 3.8 |
| | 3.9 |
| | 0.1 |
| | 11.8 |
| | 11.8 |
| | — |
|
General and administrative | 1.1 |
| | 1.3 |
| | 0.2 |
| | 4.3 |
| | 4.5 |
| | 0.2 |
|
Other (gains) and charges | 2.4 |
| | — |
| | (2.4 | ) | | 2.5 |
| | — |
| | (2.5 | ) |
Total operating costs and expenses | 91.6 |
| | 96.4 |
| | 4.8 |
| | 285.2 |
| | 291.5 |
| | 6.3 |
|
Operating income (loss) | $ | 4.0 |
| | $ | 10.2 |
| | $ | (6.2 | ) | | $ | 27.0 |
| | $ | 35.5 |
| | $ | (8.5 | ) |
Operating income as a percentage of Total revenues | 4.2 | % | | 9.6 | % | | (5.4 | )% | | 8.6 | % | | 10.9 | % | | (2.3 | )% |
| |
(1)
| Company restaurant expenses includes Food and beverage costs, Restaurant labor, and Restaurant expenses, including advertising expenses. |
Thirteen Week Period Ended March 25,September 23, 2020 compared to March 27,September 25, 2019
Maggiano’s Total revenues decreased 10.3%40.7% primarily due to lower comparable restaurantdining room guest traffic including lower banquet volume, partially offset by increased off-premise sales driven by reduced dining and banquet room traffic due to the COVID-19 pandemic and negative weather.including It’s Just Wings. Refer to “Revenues” section above for further details about Maggiano’s revenues changes.
Company restaurant expenses for Maggiano’s, as a percentage of Company sales, increased 2.3% for Maggiano’s4.0% primarily driven by 3.0%consisting of 15.6% of sales deleverage as a result of COVID-19, 0.4%and 2.5% of higher rent expenses dueprimarily related to delivery fees and supplies in connection with the sale leaseback of one restaurantgrowth in the fourth quarter of fiscal 2019, 0.4% of higher hourly labor wage rates and taxes, 0.2% of unfavorable menu item mix.off-premise sales. These increases were partially offset by 0.8%9.4% of lower manager bonus expenses, 0.5%
and hourly labor as a result of reduced staffing during the first quarter of fiscal 2021, 1.7% of lower repairs and maintenance expenses, 0.3%0.7% of increased menu pricing and 0.1%lower credit card fees, 0.6% of lower utilities expenses, 0.6% of lower advertising, 0.5% of favorable other net Company restaurant expenses.menu item mix, and 0.4% of favorable menu pricing.
Other (gains)
Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Thirteen Week Periods Ended | | |
| | | | | | | September 23, 2020 | | September 25, 2019 | | Change |
Effective income tax rate | | | | | | | (4.9) | % | | 11.3 | % | | (16.2) | % |
The federal statutory tax rate was 21.0% for both thirteen week periods ended September 23, 2020 and charges for Maggiano’s duringSeptember 25, 2019.
The effective income tax rate in the thirteen week period ended March 25, 2020 consisted primarily of $2.3 million of charges related to the COVID-19 pandemic from employee relief payments and inventory spoilage
Thirty-Nine Week Period Ended March 25, 2020 compared to March 27, 2019
Maggiano’s Total revenues decreased 4.5% due to lower comparable restaurant sales driven by reduced dining and banquet room traffic due to the COVID-19 pandemic. Refer to “Revenues” section above for further details about Maggiano’s revenues changes.
Company restaurant expenses as a percentage of Company sales increased 1.1%, for Maggiano’s primarily driven by 1.0% of sales deleverage as a result of COVID-19, 0.7% of higher hourly labor wage rates and taxes, 0.4% of unfavorable menu item mix, and 0.3% of higher rent expenses due to the sale leaseback of one restaurant in the fourth quarter of fiscal 2019, partially offset by 0.5% of lower management salaries and taxes, 0.3% of increased menu pricing, 0.3% of lower repairs and maintenance expenses and 0.2% of favorable other net Company restaurant expenses.
Other (gains) and charges for Maggiano’s during the thirty-nine week period ended March 25, 2020 consisted primarily of $2.3 million of charges related to the COVID-19 pandemic from employee relief payments and inventory spoilage.
Income Taxes
|
| | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | | | Thirty-Nine Week Periods Ended | | |
| March 25, 2020 | | March 27, 2019 | | Change | | March 25, 2020 | | March 27, 2019 | | Change |
Effective income tax rate | (13.2 | )% | | 10.3 | % | | (23.5 | )% | | (0.8 | )% | | 11.7 | % | | (12.5 | )% |
The effective income tax rates in the thirteen and thirty-nine week periods ended March 25,September 23, 2020 decreased compared to the thirteen and thirty-nine week periodsperiod ended March 27,September 25, 2019 primarily driven by reduced profitability relateddue to the COVID-19 pandemic in the third quarter of fiscal 2020, andfavorable impact from the FICA tax credit in fiscal 2020. The provision for income taxes includes a significant reductionand excess tax windfalls associated with stock-based compensation in the thirdfirst quarter of fiscal 2020 necessary to align the year-to-date provision for income taxes to the year-to-date income.2021.
Liquidity and Capital Resources
COVID-19 Impact on Liquidity
Typically, cash flows generated from operating activities are our principal source of liquidity, which we use to finance capital expenditures, such as remodels, maintaining existing restaurants and constructing new restaurants, to pay dividends and to repurchase shares of our common stock. AsOur strategic decision to enhance our off-premise business has enabled us to conveniently serve a significantly higher volume of March 25, 2020, dueoff-premise guests during this pandemic compared to the COVID-19 pandemic all restaurant dining rooms were closured as we transitioned to a 100% off-premise model by the end of the third quarter of fiscal 2020. We may not be able to generate sufficient cash from operations to cover all of our projected expenditures while operating at this reduced capacity. In response to this impact, dueother industry competitors. Due to the uncertainty in the economy and to preserve liquidity, we have taken proactive precautionary measures to raise additional capital, reduce costs and pausedpause non-critical projects that do not significantly impact our current operations. These measures during fiscal 2021 included:
•Amended our revolving credit facility to extend the maturity and provide additional flexibility during this time;
Significantly reduced•Reduced capital expenditures, although we have begun to essential spend only, including suspendingstrategically resume the Chili’s remodel program and delaying construction of certain new restaurants;
| |
• | Reduced pay for corporate leadership and team members, as well as above-restaurant level leadership;
|
| |
• | Reduced marketing, general and administrative and restaurant expenses not related to supporting the off-premise only business model;
|
| |
• | Suspended•Reduced marketing, general and administrative and restaurant expenses; •Continued the suspension of both the quarterly cash dividend and all share repurchase activity; and |
| |
• | Engaged in discussions with our landlords, vendors and other business partners to reduce or defer our lease and other contractual payments and obtain other concessions.
|
As of April 24, 2020, we have total liquidity of $175 million, comprised of total cash and revolver availability. Given the current sales levels and reductions in expenses, we estimate an average cash burn level of approximately $5 million per week while our business is primarily operating as off-premise. As a precautionary measure, we continue to evaluate additional sources of capital as we navigate through this evolving situation, and the Company is filing an automatic shelf registration statement on Form S-3ASR to provideshare repurchase program; and
•Amended the Company with flexibility to access the public capital marketsfiscal 2018 and fiscal 2019 U.S. Consolidated Income tax returns in order to respond to future financing and business opportunities if and whenclaim the Company deems appropriate. We believe we have sufficient liquidityincreased depreciation deductions for Brinker’s qualified improvement property in accordance with our current capital position and continued growththe CARES Act which resulted in sales to cover all current obligations.
In March 2020 and subsequently in April 2020, S&P lowered our corporate credit rating to B+ with negative outlook. Also in March 2020, Moody’s lowered us to a corporate family rating Ba3. The downgrades were a resultan anticipated refund of the expectation that the spread of COVID-19 could sharply reduce restaurant traffic and customer spending due to collapsing consumer confidence and unprecedented precautionary measures implemented by state and local governments, including temporary closures. These ratings and our current credit condition affect, among other things, our ability to access new capital. Negative changes to these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. Our credit ratings could be lowered, or rating agencies could issue adverse commentaries in the future, which could have a material adverse effect on our business, financial condition, results of operations, and liquidity. In particular, a weakening of our financial condition, including any further increase in our
$4.6 million.
leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, could result in a credit rating downgrade or change in outlook, or could otherwise increase our cost of borrowing.
Cash Flows
Cash Flows from Operating Activities
|
| | | | | | | | | | | |
| Thirty-Nine Week Periods Ended | | Favorable (Unfavorable) Variance |
| March 25, 2020 | | March 27, 2019 | |
Net cash provided by operating activities | $ | 237.8 |
| | $ | 150.6 |
| | $ | 87.2 |
|
| | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | Favorable (Unfavorable) Variance |
| September 23, 2020 | | September 25, 2019 | |
Net cash provided by operating activities | $ | 82.8 | | | $ | 86.6 | | | $ | (3.8) | |
Net cash fromprovided by operating activities increaseddecreased primarily due to $75.0 millionlower sales in the first quarter of tax payments made in fiscal 2019 related to2021 as a result of the sale leaseback gains and $14.0 millionCOVID-19 pandemic, the timing of income tax refunds received(net of payments), and the timing of operational receipts and payments, partially offset by additional deferred payroll taxes as a result of the CARES Act and a lower profit sharing payment in the current fiscal 2020.year.
Cash Flows from Investing Activities
| | | Thirty-Nine Week Periods Ended | | Favorable (Unfavorable) Variance | | Thirteen Week Periods Ended | | Favorable (Unfavorable) Variance |
| March 25, 2020 | | March 27, 2019 | | | September 23, 2020 | | September 25, 2019 | |
Cash flows from investing activities | | | | | | Cash flows from investing activities | | | | | |
Payments for property and equipment | $ | (82.0 | ) | | $ | (128.0 | ) | | $ | 46.0 |
| Payments for property and equipment | $ | (13.6) | | | $ | (20.5) | | | $ | 6.9 | |
Payments for franchise restaurant acquisitions | (94.6 | ) | | (1.3 | ) | | (93.3 | ) | Payments for franchise restaurant acquisitions | — | | | (96.2) | | | 96.2 | |
Proceeds from sale of assets | 1.0 |
| | 1.4 |
| | (0.4 | ) | Proceeds from sale of assets | — | | | 0.2 | | | (0.2) | |
Proceeds from note receivable | 2.2 |
| | 2.0 |
| | 0.2 |
| Proceeds from note receivable | 0.6 | | | 0.7 | | | (0.1) | |
Insurance recoveries | — |
| | 1.4 |
| | (1.4 | ) | |
Proceeds from sale leaseback transactions, net of related expenses | — |
| | 468.8 |
| | (468.8 | ) | |
Net cash (used in) provided by investing activities | $ | (173.4 | ) | | $ | 344.3 |
| | $ | (517.7 | ) | |
| Net cash used in investing activities | | Net cash used in investing activities | $ | (13.0) | | | $ | (115.8) | | | $ | 102.8 | |
Net cash fromused in investing activities decreased primarily due to $468.8$96.2 million in net cash proceeds received from the sale leaseback transactions during fiscal 2019. Additionally, $93.3 millionof cash consideration and related transactional charges were paid for the purchase of 116 Chili’s restaurants from a franchisee during fiscal 2020. These decreases were partially offset by $46.0 million of lowerin the prior year. Additionally, capital expenditures decreased in fiscal 20202021 primarily relateddue to a reduction in spend for routine capital purchases in order to prioritize debt repayment, the timing of spend on new restaurants, and a decline in the pace of the Chili’s remodel program and fiscal 2019 expenditures for our new corporate headquarters, partially offset by an increase in new restaurant construction during fiscal 2020.initiative.
Cash Flows from Financing Activities
| | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | Favorable (Unfavorable) Variance |
| September 23, 2020 | | September 25, 2019 | |
Cash flows from financing activities | | | | | |
Borrowings on revolving credit facility | $ | 28.4 | | | $ | 299.0 | | | $ | (270.6) | |
Payments on revolving credit facility | (75.0) | | | (227.0) | | | 152.0 | |
Purchases of treasury stock | (3.9) | | | (11.3) | | | 7.4 | |
Payments of dividends | (1.3) | | | (14.8) | | | 13.5 | |
Payments on long-term debt | (4.6) | | | (2.4) | | | (2.2) | |
Proceeds from issuance of treasury stock | 3.0 | | | 1.3 | | | 1.7 | |
Payments for debt issuance costs | (1.5) | | | — | | | (1.5) | |
Net cash (used in) provided by financing activities | $ | (54.9) | | | $ | 44.8 | | | $ | (99.7) | |
|
| | | | | | | | | | | |
| Thirty-Nine Week Periods Ended | | Favorable (Unfavorable) Variance |
| March 25, 2020 | | March 27, 2019 | |
Cash flows from financing activities | | | | | |
Borrowings on revolving credit facility | $ | 806.8 |
| | $ | 626.0 |
| | $ | 180.8 |
|
Payments on revolving credit facility | (630.0 | ) | | (903.0 | ) | | 273.0 |
|
Purchases of treasury stock | (32.3 | ) | | (167.7 | ) | | 135.4 |
|
Payments of dividends | (43.3 | ) | | (46.0 | ) | | 2.7 |
|
Payments on long-term debt | (12.4 | ) | | (5.7 | ) | | (6.7 | ) |
Proceeds from issuances of treasury stock | 1.6 |
| | 2.8 |
| | (1.2 | ) |
Payments for debt issuance costs | (1.0 | ) | | — |
| | (1.0 | ) |
Net cash provided by (used in) financing activities | $ | 89.4 |
| | $ | (493.6 | ) | | $ | 583.0 |
|
Net cash fromused in financing activities increased primarily due to a $453.8$46.6 million increaseof net repayment activity in fiscal 2021 compared to $72.0 million of net borrowing activity in fiscal 2020 on the revolving credit facility, partially offset by the impact of suspending the payment of dividends and a decrease of $135.4 million in share repurchases.
repurchases.
Revolving Credit Facility
Net borrowingsrepayments of $176.8$46.6 million were drawnmade during the thirty-ninethirteen week period ended March 25,September 23, 2020 on the $1.0 billion revolving credit facility primarily to fund ongoing business operations, the acquisition of Chili’s restaurants and share repurchases.from cash from operations. As of March 25,September 23, 2020, $300.0$573.7 million of credit was available under the revolving credit facility that was subsequently amended as described below. facility.
In the secondfirst quarter of fiscal 2020,2021, we modifiedexecuted the $110.0 million portion ofseventh amendment to the revolving credit facility to extendfacility. This amendment extended the maturity date $110.0to December 12, 2022, and contained a required commitment reduction to $900.0 million from March 12, 2020 toon September 12, 2021 which coincides withfrom the maturity dateprevious $1.0 billion commitment. Refer to Note 10 - Debt for the $890.0 million.
Subsequentmore information. Additionally, subsequent to the third quarter of fiscal 2020, we amended the revolving credit facility to provide additional liquidity and financial flexibility during the COVID-19 pandemic. The amendment provides a waiver of compliance with financial covenants until the end of the first quarter of fiscal 2021. As a result of this amendment, for a limited time our borrowing capacity has been reduced to $800.02021, $20.0 million and the interest rate shall be increased to LIBOR plus 1.95%, with a maximum of LIBOR plus 2.25%. Additionally, the LIBOR floor was permanently increased to 0.75%. During this period, we have supplemental reporting obligations to the banks and will be prohibited from making dividends, stock repurchases and investments. Following this waiver period, we will return to $1.0 billion borrowing capacity, and also be subject to a $50.0 million aggregate limitationadditional net payments were made on dividends, stock repurchases and investments. This amendment also expanded the collateral securing the revolving credit facility including intellectual property, among other things, and requires additional subsidiary guarantees. Subsequent to the endas of the third quarter of fiscal 2020, no additional borrowings were drawndate that this Quarterly Report on the revolving credit facility.Form 10-Q was filed.
As of March 25,September 23, 2020, pursuant to the amendment to theamended revolving credit facility described above,and under the terms of the indentures governing our 2023 Notes and 2024 Notes, we are in compliance with the financial covenants is waived until the end of the first quarter of fiscal 2021.our covenants. Refer to Note 10 - Debt for further information about our notes and revolving credit facility.
Share Repurchase Program
DuringIn the thirty-nine week period ended March 25,fourth quarter of fiscal 2020, we repurchased 0.8 million shares of our common stock for $32.3 million. At March 25, 2020, we had $166.8 million remaining in our existing share repurchase program authorizedwas primarily suspended in response to the liquidity needs created by the Board of Directors. OurCOVID-19 pandemic. Prior to the suspension, our share repurchase program has beenwas used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. The repurchased shares duringawards. In the thirty-ninethirteen week period ended March 25,September 23, 2020, includedwe repurchased 0.1 million shares purchased as part of our share repurchase program andsolely related to shares repurchased to satisfy team member tax withholding obligations on the vesting of restricted shares. Before the suspension, Repurchasedin the thirteen week period ended September 25, 2019, we repurchased 0.3 million shares are reflected as an increase in Treasuryof our common stock withinShareholders’ deficitin theConsolidated Balance Sheets (Unaudited).for $11.3 million.
Dividend Program
Subsequent toIn the thirdfourth quarter of fiscal 2020, our Board of Directors hasquarterly cash dividend was suspended our share repurchase program as a result ofin response to the liquidity needs created by the COVID-19 impact.
Dividend Program
During the thirty-nine week period ended March 25, 2020, we declared a quarterly dividend on January 27, 2020, that was paid subsequent to the third quarter of fiscal 2020, on March 26, 2020, in the amount of $0.38 per share.
Subsequent to quarter end,pandemic. Before this suspension, our Board of Directors votedapproved quarterly dividends of $0.38 per share paid quarterly. In the thirteen week period ended September 23, 2020, dividends paid solely related to suspend the quarterly cash dividend duepreviously accrued dividends for restricted share awards that vested in the period. Restricted share award dividends are accrued in Other accrued liabilities for the current portion to uncertainty surroundingvest within 12 months, and Other liabilities for the duration of closures of our dining rooms and other restrictions mandated by state and local governments in response to COVID-19. The Board of Directorsportion that will reevaluatevest after one year. Before the suspension, as developments surroundingin the COVID-19 pandemic mature. There is significant uncertainty regarding the future impactthirteen week period ended September 25, 2019, we paid dividends of the pandemic on the restaurant industry and the broader US economy.$14.8 million to common stock shareholders.
Cash Flow Outlook
We believe that our various sources of capital, including future cash flow from operating activities and availability under our existing credit facility are adequate to finance operations as well as the repayment of current debt obligations within the next year. We believe we secured access to sufficient liquidity during the COVID-19 pandemic, as we continue to serve customers at mostsubstantially all of our locations through our off-premise offerings.offerings and limited capacity dining rooms. We also believe this COVID-19 pandemic is temporary, and we will continue to monitor the situation and intend to resume normal business operations on a case by case basis when permitted under applicable government regulations and when we believe we are able to do so safely. Please refer above to COVID-19 Impact on Liquidity for further details on our actions to maintain our liquidity position during this pandemic.
We are not aware of any other event or trend that would potentially materially affect our liquidity. In the event such a trend develops, we believe that there are sufficient funds available under our credit facility and from our internal cash generating capabilities to adequately manage our ongoing business.
OFF-BALANCE SHEET ARRANGEMENTS
We have obligations for guarantees on certain lease agreements and letters of credit as disclosed in Note 1514 - Contingencies, in the Consolidated Financial Statements (Unaudited), and have entered into certain pre-commencement leases as disclosed in Note 49 - Leases included in the Notes to the Consolidated Financial Statements (Unaudited) set forth in Part I, Item 1 of this Form 10-Q report. Other than these items, we do not have any off-balance sheet arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS
The impact of recent accounting pronouncements can be found at Note 1 - Basis of Presentation for adopted guidance and Note 162 - Effect of New Accounting Standards for updates that have not yet been adopted, in the Notes to the Consolidated Financial Statements (Unaudited) set forth in Part I, Item 1 of this Form 10-Q report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Subsequent to March 25, 2020, the only material change to our instruments and positions that are sensitive to market risk since the disclosures set forth in our fiscal 2019 Form 10-K was the amendment to our revolving credit facility that carries a variable interest rate. Refer to Note 10 - Debt for further details about this facility.
There have been no other material changes in our quantitative and qualitative market risks set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended June 26, 2019.24, 2020.
ITEM 4. CONTROLS AND PROCEDURES
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.
Changes in Internal Control Over Financial Reporting
Beginning on June 27, 2019, the first day of fiscal 2020, we integrated certain new controls to ensure the completeness and accuracy of the adoption of FASB Accounting Standards Codification Topic 842, Leases (“ASC 842”). Although this new leasing standard has had an immaterial impact on our ongoing net income, in connection with its adoption, we additionally implemented changes to our processes and control activities related to lease accounting. These changes included the development of new policies based on ASC 842, utilizing a newly adopted third party lease software, new training, ongoing contract review requirements, and gathering of information provided for disclosures.
Internal Control Over Financial Reporting
Other than changes described above in Changes in Internal Control Over Financial Reporting, thereThere were no changes in our internal control over financial reporting during the thirteen week period ended March 25,September 23, 2020 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 26, 2019,24, 2020, 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: disruptions from COVID-19 pandemic, the impact of competition, changes in consumer preferences, consumer perception of food safety, reduced disposable income, unfavorable publicity, increased minimum wages, governmental regulations, the impact of mergers, acquisitions, divestitures and other strategic transactions, the Company’s ability to meet its business strategy plan, third party delivery risks, loss of key management personnel, failure to hire and retain high-quality restaurant management, the impact of social media, failure to protect the security of data of our guests and team members, product availability, regional business and economic conditions, litigation, franchisee success, changes in interest rates due to phase out of LIBOR, downgrades in our credit ratings, inflation, changes in the retail industry, technology failures, failure to protect our intellectual property, outsourcing, impairment of goodwill or assets, failure to maintain effective internal control over financial reporting, actions of activist shareholders, adverse weather conditions, terrorist acts, health epidemics or pandemics (such as COVID-19), tax reform, changes in financial and credit markets, weather, inadequate insurance coverage and weather.limitations imposed by our credit agreements.
We expectIt is possible that there could be a material adverse impact on our revenues, results of operations and cash flows in connection with COVID-19. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which the conditions surrounding
COVID-19 will change, including the duration or re-emergence of restrictions and dining room closure requirements, staffing levels for reopened dining rooms and customer re-engagement with our brands. As a result, we have leveraged our liquidity availability, and have drawn on our revolving credit facility to increase our cash position and help preserve our financial flexibility, refer to Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations discussions on Liquidity for further information.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding legal proceedings is incorporated by reference from Note 1514 - Contingencies to the Notes to the Consolidated Financial Statements (Unaudited) set forth in Part I, Item 1 of this Form 10-Q report.
ITEM 1A. RISK FACTORS
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 26, 2019,24, 2020, 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.
The novel coronavirus (COVID-19) pandemic has disrupted and is expected to continue to disrupt our business, which has and could continue to materially affect our operations, financial condition and results of operations for an extendedDuring the thirteen week period of time.
The novel coronavirus (“COVID-19”) pandemic has had an adverse effect that is material on our business. The COVID-19 pandemic, federal, state and local government responses to COVID-19, our guests’ responses to the pandemic, and our Company’s responses to the pandemic have all disrupted and will continue to disrupt our business. In the United States, as well as globally, individuals are being encouraged to practice social distancing, restricted from gathering in groups and in some areas, placed on complete restriction from non-essential movements outside of their homes. In response to the COVID-19 pandemic and these changing conditions, as of March 25,ended September 23, 2020, we have temporarily closed the dining rooms in all of our restaurants and we are operating on an off-premise only model in the majority of our locations. We have closed certain restaurants, modified work hours for our team members and identified and implemented cost savings measures throughout our operations. The COVID-19 pandemic’s impact on the economy in general could also adversely affect our guests’ financial condition, resulting in reduced spending at restaurants. The COVID-19 pandemic and these responses have affected and will continue to adversely affect our guest traffic, sales and operating costs and we cannot predict how long the pandemic will last or what other government responses may occur.
If the business interruptions caused by COVID-19 last longer than we expect, we may need to seek other sources of liquidity. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts. As discussed in this report, we have amended our revolving credit facility to preserve liquidity and allow us financial flexibility. A material increase in our level of debt or material impairments of our assets could cause our debt to total cash flow ratio to exceed the maximum level permitted under the covenant in our revolving credit facility agreement.
Our restaurant operations could be further disrupted if any of our team members are diagnosed with COVID-19 and the circumstances require quarantine of some or all of a restaurant’s employees and disinfection of the restaurant facilities. If a significant percentage of our workforce is unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, our operations may be negatively impacted, potentially materially adversely affecting our liquidity, financial condition or results of operations. Additionally, we have implemented COVID-19 emergency pay policies and taken other employee compensation relief actions to support our restaurant team members during the COVID-19 business interruption, but those actions may not be sufficient to compensate our team members for the entire duration of any business interruption resulting from COVID-19. Those team members might seek and find other employment during that interruption, which could materially adversely affect our ability to properly staff and reopen our dining rooms with experienced team members when permitted to do so by governments.
Our suppliers could be adversely impacted by the COVID-19 pandemic. If our suppliers’ employees are unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, we could face shortages of food items or other supplies at our restaurants and our operations and sales could be adversely impacted by such supply interruptions.
The equity markets in the United States have been extremely volatile due to the COVID-19 pandemic and the Company’s stock price has fluctuated significantly.
We cannot predict how soon we will be able to reopen our dining rooms and, as, our ability to reopen dining rooms will depend in part on the actions of a number of governmental bodies over which we have no control. Moreover, once restrictions are lifted, it is unclear how quickly guests will return to our restaurants, which may be a function of continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions, including
job losses. Considering the significant uncertainty as to when we can reopen some or all of our dining rooms and the uncertain guest demand environment, in addition to the actions described above, we have taken action to reduce our cash expenditures, which may impact our future growth, refer to Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations discussions on Liquidity for further information.
There have been no other 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 26, 2019.24, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the fourth quarter of fiscal 2020, our share repurchase program was suspended due to the impact from the COVID-19 pandemic. During the thirteen week period ended March 25,September 23, 2020, we repurchased shares solely to satisfy team member tax withholding obligations on the vesting of restricted shares as follows (in millions, except per share amounts, unless otherwise noted):
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value that May Yet be Purchased Under the Program(2) |
June 25, 2020 through July 29, 2020 | — | | | $ | — | | | — | | | $ | 166.8 | |
July 30, 2020 through August 26, 2020 | 0.0 | | | 37.09 | | | — | | | 166.8 | |
August 27, 2020 through September 23, 2020 | 0.1 | | | 43.91 | | | — | | | 166.8 | |
Total | 0.1 | | | 41.53 | | | — | | | |
(1)These amounts include shares purchased as part of our publicly announced programs and shares owned and tendered by team members to satisfy tax withholding obligations on the vesting of restricted share awards, which are not deducted from shares available to be purchased under publicly announced programs. Unless otherwise indicated, shares owned and tendered by team members to satisfy tax withholding obligations were purchased at the average of the high and low prices of the Company’s shares on the date of vesting. During the thirteen week period ended September 23, 2020, 96 thousand shares were tendered by team members at an average price of $41.53.
(2)The final amount shown is as of September 23, 2020.
ITEM 5. OTHER INFORMATION
None.