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"We are focused on delivering flavorful food at a great value with outstanding hospitality for our guests," says Doub Brooks, chairman and CEO of Brinker International. "The combination of a commitment to our guests and disciplined restaurant management resulted in margin improvement in the third quarter and will enable our continued success over the long-term."
In the second quarter of fiscal 2009, the company completed the sale of Macaroni Grill while retaining a minority ownership interest. The information presented below includes Macaroni Grill unless otherwise noted.
Brinker reported revenues for the 13-week period of $857.4 million, a decrease of 20.4 percent compared with $1,077.2 million reported for the same period of fiscal 2008. The company experienced a 5.6 percent decrease in comparable restaurant sales (see Table 1) in the third quarter of fiscal 2009 due to decreases across all brands. Revenues were also negatively impacted by a net decline in capacity of 17.7 percent due to 47 restaurant closures (3 of which were Macaroni Grills) and the sale of 198 restaurants since the third quarter of fiscal 2008 (189 of which were Macaroni Grills).
Quarterly Operating Performance
Operating margins for the third quarter of fiscal 2009 were positively impacted by a disciplined focus on cost of sales, labor productivity, and fixed costs, which helped offset the impact of the current sales environment. Efforts to reduce waste and update menus to reflect the guests' current focus on value resulted in improvements in cost of sales. In addition, Brinker's shift in emphasis from company-owned new restaurant development to the operations of existing restaurants led to lower pre-opening expenses as well as improved operational efficiency and lower labor costs through a reduction in turnover. The company believes these changes along with the closure of underperforming restaurants will allow margin improvements to be sustainable in the future.
Cost of sales, as a percent of revenues, decreased from 28.9 percent in the prior year to 27.9 percent in the third quarter of fiscal 2009. During the quarter, efficiency improvements, menu item changes at Chili's and On The Border, and favorable menu price changes more than offset the negative impact of unfavorable commodity prices primarily related to chicken, beef, cooking oil, and sauces.
Restaurant expenses, as a percent of revenues, decreased to 54.6 percent from 56.8 percent in the prior year primarily due to lower labor costs and pre-opening expenses.
Depreciation and amortization remained essentially flat on a dollar basis compared to the prior year.
General and administrative expense decreased $5.0 million for the quarter due to reduced salary expense from lower headcount and income related to transitional services provided to Macaroni Grill that offsets the internal cost of providing the services.
Other gains and charges resulted in $17.9 million of charges in the third quarter of fiscal 2009 primarily due to $10.2 million of lease termination charges related to the closure of certain underperforming restaurants and $5.4 million of severance costs.
Interest expense decreased $3.3 million due to lower interest rates and lower average borrowings as compared to the same quarter last year.
The effective income tax rate changed from a benefit of 44.7 percent in the third quarter of fiscal 2008 to a provision of 28.9 percent in the current quarter primarily due to the tax effects of the impairment of Macaroni Grill assets in the prior year.
Cash Flow and Capital Allocation
For the first nine months of fiscal 2009, cash flow from operations was $184.5 million and capital expenditures totaled $74.6 million. In February 2009, the company entered into a $215 million unsecured, three-year revolving credit facility replacing its existing facility that was set to expire in October 2009. Payments of $59.3 million were made on the revolving credit facility during the third quarter of fiscal 2009 resulting in fiscal year-to-date debt reductions of $123.3 million. Subsequent to the end of the third quarter, the remaining $30.7 million balance on the revolving credit facility was paid down to zero.
Investors and interested parties are invited to listen to today's conference call, as management will provide further details of the quarter. The call will be broadcast live on the Brinker Web site brinker.com at 9 a.m. CDT today (April 21). For those who are unable to listen to the live broadcast, a replay of the call will be available shortly thereafter and will remain on the Brinker Web site until the end of the day on May 19, 2009.
Additional financial information, including reconciliation details and debt covenant information, is also available on the Brinker Web site under the Financial Information section of the Investor tab.