UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) | |
[X] | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended: December 30, 2018 | |
Or | |
[ ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ______ to ______ | |
Commission File Number: 001-35625
BLOOMIN’ BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-8023465 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
2202 North West Shore Boulevard, Suite 500, Tampa, Florida 33607
(Address of principal executive offices) (Zip Code)
(813) 282-1225
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |||
Common Stock, $0.01 par value | The Nasdaq Stock Market LLC (Nasdaq Global Select Market) | |||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ý NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ý NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý Accelerated filer o Non-accelerated filer o
Smaller reporting company o Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO ý
The aggregate market value of common stock held by non-affiliates (based on the closing price on the last business day of the registrant’s most recently completed second fiscal quarter as reported on the Nasdaq Global Select Market) was $1.8 billion.
As of February 22, 2019, 91,399,452 shares of common stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2019 Annual Meeting of Stockholders, expected to be held on April 30, 2019, are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.
BLOOMIN’ BRANDS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For Fiscal Year 2018
TABLE OF CONTENTS
PAGE NO. | |
PART I | |
PART II | |
PART III | |
PART IV | |
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PART I
Cautionary Statement
This Annual Report on Form 10-K (the “Report”) includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “feels,” “seeks,” “forecasts,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could” or “would” or, in each case, their negative or other variations or comparable terminology, although not all forward-looking statements are accompanied by such terms. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this Report. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause actual results to differ materially from statements made or suggested by forward-looking statements include, but are not limited to, those described in the “Risk Factors” section of this Report and the following:
(i) | Consumer reactions to public health and food safety issues; |
(ii) | Our ability to compete in the highly competitive restaurant industry with many well-established competitors and new market entrants; |
(iii) | Minimum wage increases and additional mandated employee benefits; |
(iv) | Economic conditions and their effects on consumer confidence and discretionary spending, consumer traffic, the cost and availability of credit and interest rates; |
(v) | Our ability to protect our information technology systems from interruption or security breach, including cyber security threats, and to protect consumer data and personal employee information; |
(vi) | Fluctuations in the price and availability of commodities; |
(vii) | Our ability to comply with governmental laws and regulations, the costs of compliance with such laws and regulations and the effects of changes to applicable laws and regulations, including tax laws and unanticipated liabilities; |
(viii) | Our ability to effectively respond to changes in patterns of consumer traffic, consumer tastes and dietary habits; |
(ix) | Our ability to implement our remodeling, relocation and expansion plans due to uncertainty in locating and acquiring attractive sites on acceptable terms, obtaining required permits and approvals, recruiting and training necessary personnel, obtaining adequate financing and estimating the performance of newly opened, remodeled or relocated restaurants; |
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(x) | The effects of international economic, political and social conditions and legal systems on our foreign operations and on foreign currency exchange rates; |
(xi) | Our ability to preserve and grow the reputation and value of our brands, particularly in light of changes in consumer engagement with social media platforms; |
(xii) | Any impairment in the carrying value of our goodwill or other intangible or long-lived assets and its effect on our financial condition and results of operations; |
(xiii) | Strategic actions, including acquisitions and dispositions, and our success in implementing these initiatives or integrating any acquired or newly created businesses; |
(xiv) | Seasonal and periodic fluctuations in our results and the effects of significant adverse weather conditions and other disasters or unforeseen events; |
(xv) | The effects of our substantial leverage and restrictive covenants in our various credit facilities on our ability to raise additional capital to fund our operations, to make capital expenditures to invest in new or renovate restaurants and to react to changes in the economy or our industry, and our exposure to interest rate risk in connection with our variable-rate debt; and |
(xvi) | The adequacy of our cash flow and earnings and other conditions which may affect our ability to pay dividends and repurchase shares of our common stock. |
In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this Report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.
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Item 1. Business
General and History - Bloomin’ Brands, Inc. (“Bloomin’ Brands,” the “Company,” “we,” “us,” and “our” and similar terms mean Bloomin’ Brands, Inc. and its subsidiaries except where the context otherwise requires) is one of the largest casual dining restaurant companies in the world, with a portfolio of leading, differentiated restaurant concepts. We have four founder-inspired concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar. Our restaurant concepts range in price point and degree of formality from casual (Outback Steakhouse and Carrabba’s Italian Grill) to upscale casual (Bonefish Grill) and fine dining (Fleming’s Prime Steakhouse & Wine Bar).
As of December 30, 2018, we owned and operated 1,193 restaurants and franchised 297 restaurants across 48 states, Puerto Rico, Guam and 20 countries.
The first Outback Steakhouse restaurant opened in 1988 and in 1996, we expanded the Outback Steakhouse concept internationally. OSI Restaurant Partners, LLC (“OSI”), a wholly-owned subsidiary of Bloomin’ Brands, is our primary operating entity.
Our Segments - We consider our restaurant concepts and international markets to be operating segments, which reflects how we manage our business, review operating performance and allocate resources. We aggregate our operating segments into two reportable segments, U.S. and International. The U.S. segment includes all restaurants operating in the U.S., and restaurants operating outside the U.S. are included in the International segment. Following is a summary of reportable segments as of December 30, 2018:
REPORTABLE SEGMENT (1) | CONCEPT | GEOGRAPHIC LOCATION | ||
U.S. | Outback Steakhouse | United States of America | ||
Carrabba’s Italian Grill | ||||
Bonefish Grill | ||||
Fleming’s Prime Steakhouse & Wine Bar | ||||
International | Outback Steakhouse | Brazil, Hong Kong/China | ||
Carrabba’s Italian Grill (Abbraccio) | Brazil | |||
_________________
(1) | Includes franchise locations. See Item 2 - Properties for disclosure of our restaurant count by state, territory and country. |
U.S. Segment
As of December 30, 2018, in our U.S. segment, we owned and operated 1,068 restaurants and franchised 164 restaurants across 48 states.
Outback Steakhouse - Outback Steakhouse is a casual steakhouse restaurant concept focused on steaks, signature flavors and Australian decor. The Outback Steakhouse menu offers seasoned and seared or wood-fire grilled steaks, chops, chicken, seafood, pasta, salads and seasonal specials. The menu also includes several specialty appetizers, including our signature Bloomin’ Onion®, and desserts, together with full bar service.
Carrabba’s Italian Grill - Offering authentic Italian cuisine passed down from its founders’ family recipes, Carrabba’s Italian Grill uses high quality ingredients to prepare fresh and handmade dishes cooked to order in a lively exhibition kitchen. Featuring a wood-burning grill inspired by the many tastes of Italy, guests can enjoy signature dishes such as our Chicken Bryan and Pollo Rosa Maria, wood-fire grilled steaks and chops, small plates and classic Italian pasta dishes in a welcoming, contemporary atmosphere.
Bonefish Grill - Bonefish Grill specializes in market-fresh fish from around the world, savory wood-grilled specialties and hand-crafted cocktails. Guests are guided through an innovative, seasonal menu, with unique specials and locally-created “Neighborhood Catch” dishes as well as beef and chicken entrées, featuring high quality and fresh ingredients.
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The Bonefish Grill experience helps guests “Escape the Ordinary,” and is based on the premise of simplicity, consistency and a strong commitment to excellence at every level.
Fleming’s Prime Steakhouse & Wine Bar - Fleming’s Prime Steakhouse & Wine Bar is a contemporary steakhouse concept featuring prime cuts of beef, chops, fresh fish, seafood and poultry, salads and side dishes. Guests will find a passion for steak and wine, reflected in an exceptional menu of hand-cut steaks, an award-winning list of wines by the glass, and seasonal menu selections showcasing locally-inspired chef dishes. The steak selection features USDA Prime corn-fed beef, both wet- and dry-aged for flavor and texture, in a variety of sizes and cuts.
International Segment
We have cross-functional, local management to support and grow restaurants in each of the countries where we have Company-owned operations. Our international operations are integrated with our corporate headquarters to leverage enterprise-wide capabilities, including marketing, finance, real estate, information technology, legal, human resources, supply chain management and productivity.
As of December 30, 2018, in our International segment, we owned and operated 125 restaurants and franchised 131 restaurants across 20 countries, Puerto Rico and Guam.
Outback Steakhouse - Our international Outback Steakhouse restaurants have a menu similar to our U.S. menu with additional variety to meet local taste preferences. In addition to the traditional Outback Special sirloin, a typical international menu may feature local beef cuts such as the Aussie Grilled Picanha in Brazil.
Carrabba’s Italian Grill (Abbraccio Cucina Italiana) - Abbraccio Cucina Italiana, our Carrabba’s Italian Grill restaurant concept in Brazil, offers a blend of traditional and modern Italian dishes. The menu varies, with additional pasta and pizza menu offerings, to account for local tastes and customs. Abbraccio Cucina Italiana also has a range of beverage options, including classically inspired cocktails and local favorites with an Italian twist.
Restaurant Overview
Selected Sales Data - Following is sales mix by product type and average check per person for Company-owned restaurants during 2018:
U.S. | INTERNATIONAL | ||||||||||||||||||
Outback Steakhouse | Carrabba’s Italian Grill | Bonefish Grill | Fleming’s Prime Steakhouse & Wine Bar | Outback Steakhouse Brazil | |||||||||||||||
Food & non-alcoholic beverage | 90 | % | 85 | % | 78 | % | 74 | % | 84 | % | |||||||||
Alcoholic beverage | 10 | % | 15 | % | 22 | % | 26 | % | 16 | % | |||||||||
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
Average check per person ($USD) | $ | 23 | $ | 23 | $ | 27 | $ | 83 | $ | 16 | |||||||||
Average check per person (R$) | R$ | 58 | |||||||||||||||||
Delivery - During 2017, we completed the rollout of delivery to 240 Outback Steakhouse and Carrabba’s Italian Grill restaurants. In the second half of 2018, we completed the rollout of delivery to more than 200 additional Outback Steakhouse and Carrabba’s Italian Grill restaurants and had over 450 restaurants offering delivery at the end of 2018.
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System-wide Restaurant Summary - Following is a system-wide rollforward of restaurants in operation during 2018:
DECEMBER 31, 2017 | 2018 ACTIVITY | DECEMBER 30, 2018 | U.S. STATE | ||||||||||
OPENED | CLOSED | COUNT | |||||||||||
Number of restaurants: | |||||||||||||
U.S. | |||||||||||||
Outback Steakhouse | |||||||||||||
Company-owned | 585 | — | (6 | ) | 579 | ||||||||
Franchised | 155 | 2 | (3 | ) | 154 | ||||||||
Total | 740 | 2 | (9 | ) | 733 | 48 | |||||||
Carrabba’s Italian Grill | |||||||||||||
Company-owned | 225 | — | (1 | ) | 224 | ||||||||
Franchised | 3 | — | — | 3 | |||||||||
Total | 228 | — | (1 | ) | 227 | 31 | |||||||
Bonefish Grill | |||||||||||||
Company-owned | 194 | — | (4 | ) | 190 | ||||||||
Franchised | 7 | — | — | 7 | |||||||||
Total | 201 | — | (4 | ) | 197 | 32 | |||||||
Fleming’s Prime Steakhouse & Wine Bar | |||||||||||||
Company-owned | 69 | 1 | — | 70 | 28 | ||||||||
Other | |||||||||||||
Company-owned | 2 | 3 | — | 5 | 1 | ||||||||
U.S. Total | 1,240 | 6 | (14 | ) | 1,232 | ||||||||
International | |||||||||||||
Company-owned | |||||||||||||
Outback Steakhouse - Brazil (1) | 87 | 5 | — | 92 | |||||||||
Other | 37 | 6 | (10 | ) | 33 | ||||||||
Franchised | |||||||||||||
Outback Steakhouse - South Korea | 72 | 10 | (6 | ) | 76 | ||||||||
Other | 53 | 3 | (1 | ) | 55 | ||||||||
International Total | 249 | 24 | (17 | ) | 256 | ||||||||
System-wide total | 1,489 | 30 | (31 | ) | 1,488 | ||||||||
(1) | The restaurant counts for Brazil are reported as of November 30, 2018 and 2017, respectively, to correspond with the balance sheet dates of this subsidiary. |
RESTAURANT DESIGN AND DEVELOPMENT
Site Design - We generally construct freestanding buildings on leased properties, although certain leased sites are also located in strip shopping centers. Construction of a new restaurant typically takes 60 to 180 days from the date the location is leased or under contract and fully permitted. In the majority of cases, future restaurant development will result from the lease of existing third-party retail space. We typically design the interior of our restaurants in-house, utilizing outside architects to develop construction documents. We have an ongoing remodel program across all of our concepts to maintain the relevance of our restaurants’ ambiance. During 2018, we remodeled the exterior of 42 Outback Steakhouse restaurants and we are currently testing prototypes for our new Outback Steakhouse interior remodel program. Once the prototype is finalized, we expect to substantially complete the Outback Steakhouse interior remodel program over a three-year period, including approximately 35 in 2019.
Site Selection Process - We have a central site selection team comprised of real estate development, property/lease management and design and construction personnel. This site selection team also utilizes a combination of existing field operations managers, internal development personnel and outside real estate brokers to identify and qualify potential sites.
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We have a relocation initiative in process, primarily related to the U.S. Outback Steakhouse brand. This multi-year relocation plan is focused on driving additional traffic to our restaurants by moving legacy restaurants to prime locations within the same trade area. During 2018, we relocated 14 U.S. Outback Steakhouse restaurants and we plan to relocate another 11 U.S. Outback Steakhouse restaurants in 2019.
Restaurant Development
We utilize the ownership structure and market entry strategy that best fits the needs for a particular market, including Company-owned units, joint ventures and franchises, as determined by demand, cost structure and economic conditions.
International Development - We continue to pursue international expansion opportunities, leveraging established equity and franchise markets in South America and Asia, and in strategically selected emerging and high-growth developed markets, with a focus on Brazil.
See Item 2 - Properties for disclosure of our international restaurant count by country.
U.S. Development - We opportunistically pursue unit growth across our concepts through existing geography fill-in and market expansion opportunities based on current location mix.
RESEARCH & DEVELOPMENT / INNOVATION
We utilize a global core menu policy to ensure consistency and quality in our menu offerings. Before we add an item to the core menu, our research and development (“R&D”) team performs a thorough review of the item, including conducting consumer research. Internationally, we have teams in our developed markets that tailor our menus to address the preferences of local consumers.
We continuously evolve our product offerings based on consumer trends and feedback. We have a 12-month pipeline of new menu and promotional items across all concepts that allows us to quickly make adjustments in response to market demands, when necessary. In addition, we continue to focus on productivity across the portfolio. For new menu items and significant product changes, we have a testing process that includes direct consumer feedback on the product and its pricing.
Menu innovation and simplification remains a high priority across all concepts. In recent years, we increased certain portion sizes at Outback Steakhouse and Carrabba’s Italian Grill, and introduced a new center-cut sirloin at Outback Steakhouse. At Bonefish Grill, we resumed sourcing fresh fish specials locally and rolled out a new brunch menu in 2018. During 2018, Fleming’s Prime Steakhouse & Wine Bar began localizing menu selections to differentiate the brand from the traditional high-end steakhouse.
INFORMATION SYSTEMS
We leverage technology to support customer engagement, labor and food productivity initiatives and restaurant operations.
To drive customer engagement, we continue to invest in technology infrastructure, including brand websites, online ordering and mobile apps. To increase customer convenience, we are leveraging our existing online ordering infrastructure to facilitate expanded off-premises dining. Additionally, we developed systems to support our new customer loyalty program with a focus on increasing traffic to our restaurants. Investments are also being made in a global supply chain management system to provide better inventory forecasting and replenishment to our restaurants, which will help manage food quality and specifications. We also continue to invest in a range of tools and infrastructure to support risk management and cyber security.
Our integrated point-of-sale system allows us to transact business in our restaurants and communicate sales data through a secure corporate network to our enterprise resource planning system and data warehouse. Our Company-owned restaurants, and most of our franchised restaurants, are connected through a portal that provides our employees and
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franchise partners with access to business information and tools that allow them to collaborate, communicate, train and share information.
ADVERTISING AND MARKETING
We advertise through a diverse set of media channels including but not limited to national/spot television, radio, social media, search engines and other digital tactics. Our concepts have active public relations programs and also rely on national promotions, site visibility, local marketing, digital marketing, direct mail, billboards and point-of-sale materials to promote our restaurants. Recently, we increased our focus on data segmentation and personalization, customer relationship management and digital advertising to be more efficient and relevant with our advertising expenditures. Internationally, we have teams in our developed markets that engage local agencies to tailor advertising to each market and develop relevant and timely promotions based on local consumer demand.
Our multi-branded loyalty program, Dine Rewards, is designed to drive incremental traffic and provide data for customer segmentation and personalization opportunities. Additionally, to help maintain consumer interest and relevance, each concept leverages limited-time offers featuring seasonal specials. We promote limited-time offers through integrated marketing programs that utilize all of our advertising resources.
RESTAURANT OPERATIONS
Management and Employees - The restaurant management staff varies by concept and restaurant size. Our restaurants employ primarily hourly employees, many of whom work part-time. The Restaurant Managing Partner has primary responsibility for the day-to-day operation of the restaurant and is required to follow Company-established operating standards. Area Operating Partners for our casual dining concepts are typically responsible for overseeing the operations of six to 12 restaurants and Restaurant Managing Partners within a specific region.
Area Operating Partner, Restaurant Managing Partner and Chef Partner Programs - In addition to base salary, Area Operating Partners, Restaurant Managing Partners and Chef Partners generally receive performance-based bonuses for providing management and supervisory services to their restaurants, certain of which may be based on a percentage of their restaurants’ monthly operating results or cash flows and/or total controllable income.
Restaurant Managing Partners and Chef Partners in the U.S. may participate in deferred compensation programs and are eligible to receive payments upon completion of their five-year employment agreement. Others receive performance-based bonuses payable upon completion of their five-year employment agreement. To fund deferred compensation arrangements, we may invest in corporate-owned life insurance policies, which are held within an irrevocable grantor or “rabbi” trust account for settlement of certain of our obligations under the deferred compensation plans. Also, on the fifth anniversary of the opening of each new U.S. Company-owned restaurant, the Area Operating Partner supervising the restaurant during the first five years of operation receives an additional performance-based bonus.
Many of our International Restaurant Managing Partners are given the option to purchase participation interests in the cash distributions of the restaurants they manage. The amount, terms and availability vary by country.
Supervision and Training - We require our Area Operating Partners and Restaurant Managing Partners to have significant experience in the full-service restaurant industry. All Area Operating Partners and Restaurant Managing Partners are required to complete a comprehensive training program that emphasizes our operating strategy, procedures and standards. The Restaurant Managing Partners and Area Operating Partners, together with our Presidents, Regional Vice Presidents, Vice Presidents of Training and Directors of Training, are responsible for selecting and training the employees for each new restaurant.
Service - In order to better assess and improve our performance, we use third-party research firms to conduct ongoing satisfaction measurement programs that provide us with industry benchmarking information for our Company-owned and franchise locations in the U.S. We have a similar consumer satisfaction measurement program for our international Company-owned and certain international franchise locations and we obtain industry benchmarking information for
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the international markets in which we operate, when available. These programs measure satisfaction across a wide range of experience elements.
SOURCING AND SUPPLY
Sourcing and Supply - We take a global approach to procurement and supply chain management, with our corporate team serving all U.S. and international concepts. In addition, we have dedicated supply chain management personnel for our international operations in South America and Asia. The supply chain management organization is responsible for all food and operating supply purchases as well as a large percentage of purchases of field and corporate services.
We address the end-to-end costs associated with the products and goods we purchase by utilizing a combination of global, regional and local suppliers to capture efficiencies and economies of scale. This “total cost of ownership” (“TCO”) approach focuses on the initial purchase price, coupled with the cost structure underlying the procurement and order fulfillment process. The TCO approach includes monitoring commodity markets and trends to execute product purchases at the most advantageous times.
We have a distribution program that includes food, beverage, smallwares and packaging goods in all major markets. This program is managed by a custom distribution company that only provides products approved for our system. This customized relationship also enables our staff to effectively manage and prioritize our supply chain.
Beef represents the majority of purchased proteins and of our overall global commodity procurement. In 2018, we primarily purchased our U.S. beef raw materials from four beef suppliers and our Brazil beef raw materials from two beef suppliers. Due to the nature of our industry, we expect to continue purchasing a substantial amount of our beef from a small number of suppliers. Other major commodity categories purchased include produce, dairy, bread and pasta, and energy sources to operate our restaurants, such as natural gas and electricity.
Quality Control - Our R&D facility is located in Tampa, Florida and serves as a global test kitchen and vendor product qualification site. Our quality assurance team manages internal auditors responsible for supplier evaluations and external third parties who inspect supplier adherence to quality, food safety and product specification. We have a program that ensures suppliers comply with quality, food safety and other specifications. Our suppliers also utilize third-party labs for food safety and quality verification. We develop sourcing strategies for all commodity categories based on the dynamics of each category. In addition, we require our supplier partners to meet or exceed our quality assurance standards.
Our operational teams have multiple touch points in the restaurants ensuring food safety, quality and freshness throughout all phases of the preparation process. In addition, we employ third-party auditors to verify our standards of food safety, training and sanitation.
RESTAURANT OWNERSHIP STRUCTURES
We generate our revenues from our Company-owned restaurants and through ongoing royalties from our franchised restaurants and sales of franchise rights.
Company-owned Restaurants - Company-owned restaurants are restaurants wholly-owned by us or in which we have a majority ownership. Our cash flows from entities in which we have a majority ownership are limited to the portion of our ownership. The results of operations of Company-owned restaurants are included in our consolidated operating results and the portion of income or loss attributable to the noncontrolling interests is eliminated in our Consolidated Statements of Operations and Comprehensive Income.
We pay royalties that range from 0.5% to 1.5% of U.S. sales on the majority of our Carrabba’s Italian Grill restaurants, pursuant to agreements we entered into with the Carrabba’s Italian Grill founders (“Carrabba’s Founders”). Each Carrabba’s Italian Grill restaurant located outside the U.S. pays a one-time lump sum fee to the Carrabba’s Founders,
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which varies depending on the size of the restaurant. No continuing royalty fee is paid to the Carrabba’s Founders for Carrabba’s Italian Grill restaurants located outside the U.S.
Unaffiliated Franchise Program - Our unaffiliated franchise agreements grant third parties rights to establish and operate a restaurant using one of our concepts. Franchised restaurants are required to be operated in accordance with the franchise agreement and in compliance with their respective concept’s standards and specifications.
Under our franchise agreements, each of our franchisees is required to pay an initial franchise fee and monthly royalties based on a percentage of gross restaurant sales. Initial franchise fees are generally $40,000 for U.S. franchisees and range between $40,000 and $75,000 for international franchisees, depending on the market. Some franchisees may also pay administration fees based on a percentage of gross restaurant sales. Following is a summary of royalty fee percentages based on our existing unaffiliated franchise agreements:
(as a % of gross Restaurant sales) | MONTHLY ROYALTY FEE PERCENTAGE |
U.S. franchisees (1) | 3.50% - 5.75% |
International franchisees (2) | 3.00% - 6.00% |
_________________
(1) | U.S. franchisees must also contribute a percentage of gross sales for national marketing programs and also spend a certain percentage of gross sales on local advertising. For U.S. franchisees, there is a maximum of 8.0% of gross restaurant sales for combined national marketing and local advertising. |
(2) | International franchisees must also spend a certain percentage of gross sales on local advertising, which varies depending on the market. |
COMPETITION
The restaurant industry is highly competitive with a substantial number of restaurant operators that compete directly and indirectly with us in respect to price, service, location and food quality, and there are other well-established competitors with significant financial and other resources. There is also active competition for management personnel, attractive suitable real estate sites, supplies and restaurant employees. In addition, competition is influenced strongly by marketing and brand reputation. At an aggregate level, all major U.S. casual dining restaurants and casual dining restaurants in the international markets in which we operate would be considered competitors of our concepts. Further, we face growing competition from the supermarket industry and home delivery services, with improved selections of prepared meals, and from quick service and fast casual restaurants, as a result of higher-quality food and beverage offerings. Internationally, we face increasing competition due to an increase in the number of casual dining restaurant options in the markets in which we operate.
GOVERNMENT REGULATION
We are subject to various federal, state, local and international laws affecting our business. Each of our restaurants is subject to licensing and regulation by a number of governmental authorities, which may include, among others, alcoholic beverage control, health and safety, nutritional menu labeling, health care, environmental and fire agencies in the state, municipality or country in which the restaurant is located.
U.S. - Alcoholic beverage sales represent 14% of our U.S. restaurant sales. Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays.
Our restaurant operations are also subject to federal and state laws for such matters as:
• | immigration, employment, minimum wages, overtime, tip credits, worker conditions and health care; |
• | nutritional labeling, nutritional content, menu labeling and food safety; |
• | the Americans with Disabilities Act, which, among other things, requires our restaurants to meet federally mandated requirements for the disabled; and |
• | information security, privacy, cashless payments, gift cards and consumer credit, protection and fraud. |
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International - Our restaurants outside of the U.S. are subject to similar local laws and regulations as our U.S. restaurants, including labor, food safety and information security. In addition, we are subject to anti-bribery and anti-corruption laws and regulations.
See Item 1A - Risk Factors for a discussion of risks relating to federal, state, local and international regulation of our business.
EXECUTIVE OFFICERS OF THE REGISTRANT
Below is a list of the names, ages, positions and a brief description of the business experience of each of our executive officers as of February 15, 2019.
NAME | AGE | POSITION | ||
Elizabeth A. Smith | 55 | Chairman of the Board of Directors and Chief Executive Officer | ||
David J. Deno | 61 | Executive Vice President and Chief Financial and Administrative Officer | ||
Jeffrey Carcara | 48 | Executive Vice President and President of Bonefish Grill | ||
Donagh M. Herlihy | 55 | Executive Vice President and Chief Information Officer | ||
Joseph J. Kadow | 62 | Executive Vice President and Chief Legal Officer | ||
Michael Kappitt | 49 | Executive Vice President and President of Carrabba’s Italian Grill | ||
Gregg Scarlett | 57 | Executive Vice President and President of Outback Steakhouse | ||
Sukhdev Singh | 55 | Executive Vice President and Chief Development Officer - International and Franchising | ||
Elizabeth A. Smith was appointed Chairman in January 2012. Since November 2009, Ms. Smith has served as Chief Executive Officer and as a member of our Board of Directors. Ms. Smith is a member of the Board of Directors of Hilton Worldwide Holdings, Inc. and was previously a member of the Board of Directors of Staples, Inc. from September 2008 to June 2014.
David J. Deno has served as Executive Vice President and Chief Financial and Administrative Officer since October 2013 and previously served as Executive Vice President and Chief Financial Officer from May 2012 to October 2013. From December 2009 to May 2012, Mr. Deno served as Chief Financial Officer of the international division of Best Buy Co. Inc. Mr. Deno previously served as President and later Chief Executive Officer of Quiznos and Chief Financial Officer and later Chief Operating Officer of YUM! Brands, Inc.
Jeffrey Carcara has served as Executive Vice President and President of Bonefish Grill since February 2019. Prior to joining Bloomin’ Brands, Mr. Carcara served as Chief Executive Officer of Emerging Brands at Del Frisco’s Restaurant Group from June 2018 to January 2019; Chief Executive Officer at Barteca Restaurant Group from August 2015 to June 2018; and Chief Operating Officer at Del Frisco’s Restaurant Group from November 2012 to August 2015.
Donagh M. Herlihy has served as Executive Vice President and Chief Information Officer since April 2018. Mr. Herlihy previously served as Executive Vice President and Chief Technology Officer from January 2018 to April 2018 and Executive Vice President, Digital and Chief Information Officer from September 2014 to January 2018. Prior to joining Bloomin’ Brands, Mr. Herlihy was Senior Vice President, Chief Information Officer and eCommerce of Avon Products, Inc. from March 2008 to August 2014.
Joseph J. Kadow has served as Executive Vice President and Chief Legal Officer since April 2005 and has served as Assistant Secretary since February 2016. Mr. Kadow previously served as Secretary from April 1994 to February 2016.
Michael Kappitt has served as Executive Vice President and President of Carrabba’s Italian Grill since February 2016. Mr. Kappitt served as Senior Vice President and Chief Marketing Officer of Bloomin’ Brands from December 2013 to February 2016 and Chief Marketing Officer of Outback Steakhouse from March 2011 to December 2013.
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Gregg Scarlett has served as Executive Vice President and President of Outback Steakhouse since July 2016. Mr. Scarlett previously served as Executive Vice President and President of Bonefish Grill from April 2015 to July 2016; Senior Vice President, Casual Dining Restaurant Operations from January 2013 to April 2015; and Senior Vice President of Operations for Outback Steakhouse from March 2010 to January 2013.
Sukhdev Singh has served as Executive Vice President and Chief Development Officer - International and Franchising since April 2018. Mr. Singh previously served as Executive Vice President and Chief Development Officer and Franchising from May 2015 to April 2018 and Senior Vice President, Chief Development Officer from January 2014 to May 2015. Prior to joining Bloomin’ Brands, Mr. Singh was Chief Development Officer for Darden Restaurants, Inc. from July 2006 to January 2014.
EMPLOYEES
As of December 30, 2018, we employed approximately 93,000 persons, of which approximately 800 are corporate personnel, including 200 in international markets. None of our U.S. employees are covered by a collective bargaining agreement. Various jurisdictional industry-wide labor agreements apply to certain of our employees in Brazil. We consider our employee relations to be in good standing.
TRADEMARKS
We regard our Outback®, Outback Steakhouse®, Carrabba’s Italian Grill®, Bonefish Grill®, and Fleming’s Prime Steakhouse & Wine Bar® service marks and our Bloomin’ Onion® trademark as having significant value and as being important factors in the marketing of our restaurants. We have also obtained trademarks for several of our other menu items and for various advertising slogans. We are aware of names and marks similar to the service marks of ours used by other persons in certain geographic areas in which we have restaurants. However, we believe such uses will not adversely affect us. Our policy is to pursue registration of our marks whenever possible and to oppose vigorously any infringement of our marks.
We license the use of our registered trademarks to franchisees and third parties through franchise arrangements and licenses. The franchise and license arrangements restrict franchisees’ and licensees’ activities with respect to the use of our trademarks, and impose quality control standards in connection with goods and services offered in connection with the trademarks.
SEASONALITY AND QUARTERLY RESULTS
Our business is subject to seasonal fluctuations. Historically, customer traffic patterns for our established U.S. restaurants are generally highest in the first quarter of the year and lowest in the third quarter of the year. International customer traffic patterns vary by market. For example, Brazil historically experiences minimal seasonal traffic fluctuations. Additionally, holidays and severe weather may affect sales volumes seasonally in some of our markets.
Quarterly results have been and will continue to be significantly affected by general economic conditions, the timing of new restaurant openings and their associated pre-opening costs, restaurant closures and exit-related costs and impairments of goodwill, definite and indefinite-lived intangible assets and property, fixtures and equipment. As a result of these and other factors, our financial results for any given quarter may not be indicative of the results that may be achieved for a full year.
ADDITIONAL INFORMATION
We make available, free of charge, through our internet website www.bloominbrands.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission (“SEC”). Our reports and other materials filed with the SEC are also available at www.sec.gov. The reference to these website addresses does not
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constitute incorporation by reference of the information contained on the websites and should not be considered part of this Report.
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Item 1A. Risk Factors
The risk factors set forth below should be carefully considered. The risks described below are those that we believe could materially and adversely affect our business, financial condition or results of operations, however, they are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations.
Risks Related to Our Business and Industry
Food safety and food-borne illness concerns in our restaurants or throughout the industry or supply chain may have an adverse effect on our business by reducing demand and increasing costs.
Regardless of the source or cause, any report of food-borne illnesses and other food safety issues, whether at one of our restaurants or in the industry or supply chain generally, could have a negative impact on our traffic and sales and adversely affect the reputation of our brands. Food safety issues could be caused by suppliers or distributors and, as a result, be out of our control. Health concerns or outbreaks of disease in a food product could also reduce demand for particular menu offerings. Even instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of other companies could result in negative publicity about the food service industry generally and adversely impact our sales. Social media has dramatically increased the rate at which negative publicity, including as it relates to food-borne illnesses, can be disseminated before there is any meaningful opportunity to respond or address an issue. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.
The restaurant industry is highly competitive and consumer options for other prepared food offerings continue to expand. Our inability to compete effectively could adversely affect our business, financial condition and results of operations.
A substantial number of restaurant operators compete directly and indirectly with us with respect to price, service, location and food quality, some of which are well-established with significant resources. There is also active competition for management and other personnel, and attractive suitable real estate sites. Consumer tastes, nutritional and dietary trends, traffic patterns and the type, number and location of competing restaurants often affect the restaurant business, and our competitors may react more efficiently, creatively and effectively to those conditions. In addition, our competitors may generate or better implement business strategies that improve the value and relevance of their brands and reputation, relative to ours. For example, our competitors may more successfully implement menu or technology initiatives, such as remote ordering, social media or mobile technology platforms that expedite or enhance the customer experience. Further, we face growing competition from quick service and fast casual restaurants, the supermarket industry and meal kit and food delivery providers, with the improvement of prepared food offerings and the trend towards convergence in grocery, deli, retail and restaurant services. We believe all of the above factors have increased competitive pressures in the casual dining sector in recent periods and we believe they will continue to present a challenging competitive environment in future periods. If we are unable to continue to compete effectively, our traffic, sales and margins could decline and our business, financial condition and results of operations would be adversely affected.
We are subject to various federal and state employment and labor laws and regulations.
Various federal and state employment and labor laws and regulations govern our relationships with our employees and affect operating costs, and similar laws and regulations apply to our operations outside of the U.S. These laws and regulations relate to matters including employment discrimination, minimum wage requirements, overtime, tip credits, unemployment tax rates, workers’ compensation rates, working conditions, immigration status, tax reporting and other wage and benefit requirements. Any significant additional government regulations and new laws governing our relationships with employees, including minimum wage increases, mandated benefits or other requirements that impose additional obligations on us, could increase our costs and adversely affect our business and results of operations.
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As a significant number of our food service and preparation personnel are paid at rates related to the applicable minimum wage, federal, state and local proposals related to minimum wage requirements or similar matters could, to the extent implemented, materially increase our labor and other costs. Several states in which we operate have recently approved minimum wage increases. As minimum wage increases are implemented in these states or any other states in which we operate in the future, we expect our labor costs will continue to increase. Our ability to respond to minimum wage increases by increasing menu prices depends on the responses of our competitors and consumers. Our distributors and suppliers could also be affected by higher minimum wage, benefit standards and compliance costs, which could result in higher costs for goods and services supplied to us.
We rely on our employees to accurately disclose the full amount of their tip income, and we base our FICA tax reporting on the disclosures provided to us by such tipped employees. Inaccurate employee FICA tax reporting could subject us to monetary liabilities, which could harm our business, results of operations and financial condition.
Challenging economic conditions may have a negative effect on our business and financial results.
Challenging economic conditions may negatively impact consumer spending and thus cause a decline in our financial results. For example, international, domestic and regional economic conditions, consumer income levels, financial market volatility, social unrest, governmental, political and budget matters and a slow or stagnant pace of economic growth generally may have a negative effect on consumer confidence and discretionary spending, which the restaurant industry depends upon. In recent years, we believe these factors and conditions may have affected consumer traffic and comparable restaurant sales for us and throughout our industry and may continue to contribute to a challenging sales environment in the casual dining sector. A decline in economic conditions or negative developments with respect to any of the other factors mentioned above, generally or in particular markets in which we operate, and our consumers’ reactions to these trends could result in increased pressure with respect to our pricing, traffic levels, commodity and other costs and the continuation of our innovation and productivity initiatives, which could negatively impact our business and results of operations. These factors could also cause us to, among other things, reduce the number and frequency of new restaurant openings, close restaurants or delay remodeling of our existing restaurant locations. Further, poor economic conditions may force nearby businesses to shut down, which could cause our restaurant locations to be less attractive.
Cyber security breaches of confidential consumer, personal employee and other material information may adversely affect our business.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data or the theft or exposure of confidential information or intellectual property. A cyber incident that compromises the information of our consumers or employees could result in widespread negative publicity, damage to the reputation of our brands, a loss of consumers, an interruption of our business and legal liabilities.
The majority of our restaurant sales are by credit or debit cards. We also maintain certain personal information regarding our employees and confidential information about our customers, franchisees and suppliers. We segment our card data environment and employ a cyber security protection program, which is based upon proven industry frameworks. This program includes but is not limited to cyber security techniques, tactics and procedures including the deployment of a robust set of security controls, continuous monitoring and detection programs, network protections, stringent vendor selection criteria, secure software development programs and ongoing employee training, awareness and incident response preparedness. In addition, we continuously scan and improve our environment for any vulnerabilities, perform penetration testing, engage third parties to assess effectiveness of our security measures and collaborate with members of the cyber security community. Our cyber security protection program is headed by our Chief Information Security Officer, who briefs our Audit Committee quarterly on cyber security measures in place. However, there are no assurances that such programs will prevent or detect cyber security breaches.
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Despite our security measures, our technology systems may be vulnerable to damage, disability or failures due to physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, employee error or malfeasance, denial of service attacks, viruses, worms and other disruptive problems. From time to time we have been, and likely will continue to be, the target of attempted cyber and other security threats. In recent years our reliance on technology has increased, and consequently so have the scope and severity of risks posed to our systems from cyber threats. Malicious attacks and intrusion efforts are continuous and evolving, and are perpetuated by many different parties with varying motives, including identity thieves, contractors, vendors, employees, competitors, prospective insider traders, so-called “hacktivists,” terrorists and others. We continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact.
Our operations and corporate functions rely heavily on information systems, including point-of-sale processing in our restaurants, management of our supply chain, payment of obligations, collection of cash, data warehousing to support analytics, finance and accounting systems, mobile technologies to enhance the customer experience and other various processes and procedures, some of which are handled by third parties. Our ability to efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, system maintenance problems, upgrading or transitioning to new platforms, or any cyber incident relating to these systems could expose our systems or information to cyber threats, result in delays in consumer service, reduced efficiency in our operations or result in negative publicity. For example, a weakness in vendor’s systems or software products may provide a mechanism for a cyber threat. In recent years, certain retailers have experienced security breaches in which customer information was stolen through vendor access channels. While we select our third-party suppliers carefully, cyber attacks and security breaches at a supplier could compromise confidential information or adversely affect our ability to deliver products and services to our customers. These problems could negatively affect our results of operations, and remediation could result in significant, unplanned capital investments.
As a merchant and service provider of point-of-sale related services, we are subject to the Payment Card Industry Data Security Standard (“PCI DSS”), issued by the Payment Card Industry Council. PCI DSS contains compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. Despite our information security measures and our efforts to comply with PCI DSS guidelines, we cannot be certain that all of our information technology systems are able to prevent, contain or detect any cyber incidents from known malware or malware that may be developed in the future.
We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our consumers’ credit or debit card information or if consumer or employee information is obtained by unauthorized persons or used inappropriately. Any such claim or proceeding, or any adverse publicity resulting from such an event, may have a material adverse effect on our business and the potential of incurring significant remediation costs.
Increased commodity, energy and other costs could decrease our profit margins or cause us to limit or otherwise modify our menus or increase prices, which could adversely affect our business.
The performance of our restaurants depends on our ability to anticipate and react to changes in the price and availability of food commodities. Our business also incurs significant costs for energy, insurance, labor, marketing and real estate. Prices may be affected by supply, market changes, increased competition, the general risk of inflation, changes in laws, shortages or interruptions in supply due to weather, disease or other conditions beyond our control, or other reasons. Increased prices or shortages could affect the cost and quality of the items we buy or require us to raise prices, limit our menu options or implement alternative processes or products. As a result, these events, combined with other more general economic and demographic conditions, could impact our pricing and negatively affect our sales and profit margins.
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Our failure to comply with government regulation related to our restaurant operations, and the costs of compliance or non-compliance, could adversely affect our business.
We are subject to various federal, state, local and foreign laws affecting our business. Each of our restaurants is subject to licensing and regulation by a number of governmental authorities, which may include, among others, alcoholic beverage control, food safety, nutritional menu labeling, health care, environmental and fire agencies in the state, municipality or country in which the restaurant is located. Our suppliers are also subject to regulation in some of these areas. Any difficulties or inabilities to retain or renew licenses, or increased compliance costs due to changed regulations, could adversely affect operations at existing restaurants. Additionally, difficulties in obtaining or failing to obtain the required licenses or approvals could delay or prevent the development of new restaurants.
Alcoholic beverage sales represent 14% of our consolidated restaurant sales and are subject to extensive state and local licensing and other regulations. The failure of a restaurant to obtain or retain a liquor license would adversely affect that restaurant’s operations. In addition, we are subject to “dram shop” statutes in certain states. These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.
The food service industry is affected by consumer preferences and perceptions. Changes in these preferences and perceptions may lessen the demand for our products, which would reduce sales and harm our business.
Food service businesses are affected by changes in consumer tastes and demographic trends. For instance, if prevailing health or dietary preferences cause consumers to avoid steak and other products we offer in any of our concepts in favor of foods or ingredients that are perceived as healthier or otherwise reflect popular demand, our business and operating results would be harmed. Various factors such as: (i) the Food and Drug Administration’s menu labeling rules, (ii) nutritional guidelines issued by the United States Department of Agriculture and issuance of similar guidelines or statistical information by state or local municipalities, and (iii) academic studies, may impact consumer choice and cause consumers to select foods other than those that are offered by our restaurants. If we are unable to anticipate or successfully respond to changes in consumer preferences, our results of operations could be adversely affected, generally or in particular concepts or markets.
Changes in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.
We are subject to income and other taxes in the United States and numerous foreign jurisdictions. Our effective income tax rate and other taxes in the future could be adversely affected by a number of factors, including changes in the mix of earnings in countries with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws or other legislative changes, including the Tax Cuts and Jobs Act (the “Tax Act”) and the Base Erosion Profit Shifting initiative being conducted by the Organization for Economic Co-operation and Development, and the outcome of income tax audits. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our historical income tax provisions and accruals. The results of a tax audit could have a material effect on our results of operations or cash flows in the period or periods for which that determination is made. In addition, our effective income tax rate and our results may be impacted by our ability to realize deferred tax benefits, including our FICA tip credit carryforwards, and by any increases or decreases of our valuation allowances applied to our existing deferred tax assets. Additional tax regulations and interpretations of the Tax Act are expected to be issued, and no assurance can be made that future guidance will not adversely affect our business or financial condition.
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Risks associated with our remodeling, relocation and expansion plans may have adverse effects on our operating results.
As part of our business strategy, we intend to continue to remodel, relocate and expand our current portfolio of restaurants. Our 2019 development schedule calls for approximately 35 Outback Steakhouse interior remodels, 11 U.S. Outback Steakhouse relocations and the construction of approximately 20 new system-wide locations. A variety of factors could cause the actual results and outcome of those plans to differ from the anticipated results, including among other things:
• | the availability of attractive sites for new or relocated restaurants; |
• | acquiring or leasing those sites at acceptable prices and other terms; |
• | funding or financing our development, given competing priorities for use of capital; |
• | obtaining all required permits, approvals and licenses on a timely basis; |
• | recruiting and training skilled management and restaurant employees and retaining those employees on acceptable terms; |
• | weather, natural disasters and other events or factors beyond our control resulting in construction or other delays; and |
• | consumer tastes in new geographic regions and acceptance of our restaurant concepts and awareness of our brands in those regions. |
It is difficult to estimate the performance of newly opened restaurants. Earnings achieved to date by restaurants open for less than two years may not be indicative of future operating results. If new restaurants do not meet targeted performance, it could have a material adverse effect on our operating results, including as a result of any impairment losses that we may be required to recognize. There is also the possibility that new restaurants may attract consumers away from other restaurants we own, thereby reducing the revenues of those existing restaurants, or that we will incur unrecoverable costs in the event a development project is abandoned prior to completion.
Some of the challenges described above could be more significant in international markets in which we have more limited experience, either generally or with a particular brand. Those markets are likely to have different competitive conditions, consumer tastes, discretionary spending patterns and brand awareness, which may cause our new restaurants to be less successful than restaurants in our existing markets or make it more difficult to estimate the performance of new restaurants.
In addition, in an effort to increase same-restaurant sales and improve our operating performance, we continue to make improvements to our facilities through our remodeling and relocation programs. We also close underperforming restaurants from time to time in order to improve the performance of our brands. As demographic and economic patterns change or there are declines in neighborhoods where our restaurants are located or adverse economic conditions in local areas, current locations may not continue to be attractive or profitable. Because we lease a significant majority of our restaurants, we incur significant lease termination expenses when we close or relocate a restaurant and are often obligated to continue rent and other lease related payments after restaurant closure. We also incur significant asset impairment and other charges in connection with closures and relocations. If the expenses associated with remodels, relocations or closures are higher than anticipated, we cannot find suitable locations or remodeled or relocated restaurants do not perform as expected, these programs may not yield the desired return on investment, which could have a negative effect on our operating results.
We face a variety of risks associated with doing business in foreign markets that could have a negative impact on our financial performance.
We have a significant number of restaurants outside of the United States, and we intend to continue our efforts to grow internationally. There is no assurance that international operations will be profitable or international growth will continue. In addition, if we have a significant concentration of restaurants in a foreign market the impact of any negative local conditions can have a sizable impact on our results.
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Our foreign operations are subject to all of the same risks as our U.S. restaurants, as well as additional risks including, among others, international economic, political, social and legal conditions and the possibility of instability and unrest, differing cultures and consumer preferences, diverse government regulations and tax systems, corruption, anti-American sentiment, the ability to source high quality ingredients and other commodities in a cost-effective manner, uncertain or differing interpretations of rights and obligations in connection with international franchise agreements and the collection of ongoing royalties from international franchisees, the availability and costs of land, construction and financing, and the availability of experienced management, appropriate franchisees and area operating partners.
During 2018, unrest surrounding the presidential election in Brazil led to protests and a lengthy truckers strike that negatively impacted the Brazilian economy, causing supply shortages and transportation gridlock that resulted in lost operating days for many businesses, including our restaurants.
Currency regulations and fluctuations in exchange rates could also affect our performance. We have operations in many foreign countries, including direct investments in restaurants in Brazil and Hong Kong/China, as well as international franchises. Brazil is our largest international market and will continue to be our top international development priority. As a result, we may experience losses from fluctuations in foreign currency exchange rates or any hedging arrangements that we enter into to offset such fluctuations, and such losses could adversely affect our overall sales and earnings.
We are subject to governmental regulation of our foreign operations, including antitrust and tax requirements, anti-boycott regulations, import/export/customs regulations and other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act. Any new regulatory or trade initiatives could impact our operations in certain countries. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could harm our business, results of operations and financial condition.
Loss of key management personnel could hurt our business and inhibit our ability to operate and grow successfully.
Our success will continue to depend, to a significant extent, on our leadership team and other key management personnel. If we are unable to attract and retain sufficiently experienced and capable management personnel, our business and financial results may suffer.
Failure to recruit, train and retain high-quality restaurant management and team members may result in lower guest satisfaction and lower sales and profitability.
Our restaurant-level management and team members are largely responsible for the quality of our service. Our guests may be dissatisfied and our sales may decline if we fail to recruit, train and retain managers and team members that effectively implement our business strategy and provide high quality guest service. There is active competition for quality management personnel and hourly team members. If we experience high turnover, we may experience higher labor costs and have a shortage of adequate management personnel required for future growth.
Our success depends substantially on the value of our brands and our ability to execute innovative marketing and consumer relationship initiatives to maintain brand relevance and drive profitable sales growth.
Our success depends on our ability to preserve and grow our brands. Our brand value and reputation are especially important to differentiate our concepts in the highly competitive casual dining sector to achieve sustainable same-restaurant sales growth and warrant new unit growth. Brand value and reputation is based in large part on consumer perceptions, which are driven by both our actions and by actions beyond our control, such as new brand strategies or their implementation, business incidents, ineffective advertising or marketing efforts, or unfavorable mainstream or social media publicity involving us, our industry, our franchisees, or our suppliers. A failure to innovate and extend our brands in ways that are relevant to consumers and occasions in order to generate sustainable same-restaurant traffic growth, and produce non-traditional sales and earnings growth opportunities, could have an adverse effect on our results of operations. Additionally, insufficient focus on our competition or failure to adequately address declines in the casual dining industry, could adversely impact results of operations.
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If our competitors increase their spending on advertising, promotions and loyalty programs, if our advertising, media or marketing expenses increase, or if our advertising, promotions and loyalty programs become less effective than those of our competitors, or if we do not adequately leverage technology and data analytic capabilities needed to generate concise competitive insight, our results of operations could be materially and adversely effected.
Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse impact on our business.
There has been a marked increase in the use of social media platforms and similar devices that allow individuals to access a broad audience of consumers and other interested persons. The availability of information on social media platforms is virtually immediate as is its impact, and users can post information often without filters or checks on the accuracy of the content posted. Adverse or inaccurate information concerning our company or concepts may be posted on such platforms at any time, and such information can quickly reach a wide audience. The harm may be immediate without affording us an opportunity for redress or correction, and it is challenging to monitor and anticipate developments on social media in order to respond in an effective and timely manner. We could also be exposed to these risks if we fail to use social media responsibly in our marketing efforts. These factors could have a material adverse effect on our business. Regardless of its basis or validity, any unfavorable publicity could adversely affect public perception of our brands.
Although search engine marketing, social media and other new technological platforms offer great opportunities to increase awareness of and engagement with our brands, a failure to use social media responsibly in our marketing efforts may further expose us to these risks. Many of our competitors are expanding their use of social media and new social media platforms are rapidly being developed, potentially making more traditional social media platforms obsolete. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal with guests and brand relevance. As part of our marketing efforts, we rely on search engine marketing and social media platforms to attract and retain guests. We also continue to invest in other digital marketing initiatives that allow us to reach our guests across multiple digital channels and build their awareness of, engagement with, and loyalty to our brands. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues, increased employee engagement or brand recognition. In addition, a variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about us, exposure of personally identifiable information, fraud, or out-of-date information. The inappropriate use of social media vehicles by our guests or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation.
An impairment in the carrying value of our goodwill or other intangible or long-lived assets could adversely affect our financial condition and results of operations.
Along with other intangible assets, we test goodwill for impairment annually and whenever events or changes in circumstances indicate that its carrying value may not be recoverable. We also evaluate long-lived assets on a quarterly basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We cannot accurately predict the amount and timing of any impairment of assets. A significant amount of judgment is involved in determining if an indication of impairment exists. Should the value of goodwill or other intangible or long-lived assets become impaired, there could be an adverse effect on our financial condition and consolidated results of operations.
We have limited control with respect to the operations of our franchisees, which could have a negative impact on our business.
Our franchisees are contractually obligated to operate their restaurants in accordance with our standards and we provide training and support to franchisees. However, franchisees are independent third parties that we do not control, and these franchisees own, operate and oversee the daily operations of their restaurants. As a result, the ultimate success and quality of any franchise restaurant rests with the franchisee. If franchisees do not successfully operate restaurants
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in a manner consistent with our product and service quality standards and contractual requirements, our image and reputation could be harmed, which in turn could adversely affect our business and operating results.
We have a limited number of suppliers for our major products and rely on one custom distribution company for our national distribution programs in the U.S. and Brazil. If our suppliers or custom distributors are unable to fulfill their obligations under their contracts or we are unable to develop or maintain relationships with these or new suppliers or distributors, if needed, we could encounter supply shortages and incur higher costs.
We depend on frequent deliveries of fresh food products that meet our specifications, and we have a limited number of suppliers for our major products, such as beef. In 2018, we purchased: (i) more than 90% of our U.S. beef raw materials from four beef suppliers that represent more than 80% of the total beef marketplace in the U.S and (ii) more than 90% of our Brazil beef raw materials from two beef suppliers that represent approximately 40% of the total Brazil beef marketplace. Due to the nature of our industry, we expect to continue to purchase a substantial amount of our beef from a small number of suppliers. We also primarily use one supplier in the U.S. and Brazil, respectively, to process beef raw materials to our specifications and we use one distribution company to provide distribution services in the U.S and Brazil, respectively. Although we have not experienced significant problems with our suppliers or distributors, if our suppliers or distributors are unable to fulfill their obligations under their contracts, we could encounter supply shortages and incur higher costs.
In addition, if we are unable to maintain current purchasing terms or ensure service availability with our suppliers and distributors, we may lose consumers and experience an increase in costs in seeking alternative supplier or distribution services. The failure to develop and maintain supplier and distributor relationships and any resulting disruptions to the provision of food and other supplies to our restaurant locations could adversely affect our operating results.
Failure to achieve our projected cost savings from our efficiency initiatives could adversely affect our results of operations and eliminate potential funding for growth opportunities.
In recent years, we have identified strategies and taken steps to reduce operating costs and free up resources to reinvest in our business. These strategies include improved supply chain management, implementing labor scheduling tools and integrating restaurant information systems across our brands. We continue to evaluate and implement further cost-saving initiatives. However, the ability to reduce our operating costs through these initiatives is subject to risks and uncertainties, such as our ability to obtain improved supply pricing and the reliability of any new suppliers or technology, and we cannot assure that these activities, or any other activities that we may undertake in the future, will achieve the desired cost savings and efficiencies. Failure to achieve such desired savings could adversely affect our results of operations and financial condition and curtail investment in growth opportunities.
There are risks and uncertainties associated with strategic actions and initiatives that we may implement.
From time to time, we consider various strategic actions and initiatives in order to grow and evolve our business and brands and improve our operating results. These actions and initiatives could include, among other things, acquisitions or dispositions of restaurants or brands, new joint ventures, new franchise arrangements, restaurant closures and changes to our operating model. There can be no assurance that any such actions or initiatives will be successful or deliver their anticipated benefits. We may be exposed to new and unforeseen risks and challenges, particularly if we enter into markets or engage in activities with which we have no or limited prior experience, and it may be difficult to predict the success of such endeavors. If we incur significant expenses or divert management, financial and other resources to a strategic initiative that is unsuccessful or does not meet our expectations, our results of operations and financial condition would be adversely affected. We may also incur significant asset impairment and other charges in connection with any such initiative. Regardless of the ultimate success of a strategic initiative, the implementation and integration of new business or operational processes could be disruptive to our current operations. Even if we test and evaluate an initiative on a limited basis, the diversion of management time and resources could have an adverse effect on our business.
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Our business is subject to seasonal and periodic fluctuations, and past results are not indicative of future results.
Historically, consumer traffic patterns for our established restaurants are generally highest in the first quarter of the year and lowest in the third quarter of the year. Holidays may also affect sales volumes seasonally in some of the markets in which we operate. In addition, our quarterly results have been and will continue to be affected by the timing of new restaurant openings and their associated preopening costs, as well as restaurant closures and exit-related costs, debt extinguishment and modification costs and impairments of goodwill, intangible assets and property, fixtures and equipment. As a result of these and other factors, our financial results for any quarter may not be indicative of the results that may be achieved for a full year.
Significant adverse weather conditions and other disasters or unforeseen events could negatively impact our results of operations.
Adverse weather conditions and natural disasters and other unforeseen events, such as winter storms, severe temperatures, thunderstorms, floods, hurricanes and earthquakes, terrorist attacks, war and widespread/pandemic illness, and the effects of such events on economic conditions and consumer spending patterns, could negatively impact our results of operations. Temporary and prolonged restaurant closures may occur and consumer traffic may decline due to the actual or perceived effects from these events. For example, severe winter weather conditions and hurricanes have impacted our traffic, and that of our franchises, and results of operations in recent years.
Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.
Our trademarks, including Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse & Wine Bar and Bloomin’ Onion, and other proprietary rights are important to our success and our competitive position. The protective actions that we take may not be sufficient to prevent unauthorized usage or imitation by others, which could harm our image, brand or competitive position. Furthermore, our ability to protect trademarks and other proprietary rights may be more limited in certain international markets where we operate.
Litigation could have a material adverse impact on our business and our financial performance.
We are subject to lawsuits, administrative proceedings and claims that arise in the regular course of business. These matters typically involve claims by consumers and others regarding issues such as food borne illness, food safety, premises liability, “dram shop” statute liability, promotional advertising and other operational issues common to the food service industry, as well as contract disputes and intellectual property infringement matters. We are also subject to employee claims against us based on, among other things, discrimination, harassment, wrongful termination, disability, or violation of wage and labor laws. These claims may divert our financial and management resources that would otherwise be used to benefit our operations. The ongoing expense of any resulting lawsuits, and any substantial settlement payment or damage award against us, could adversely affect our business and results of operations. Significant legal fees and costs in complex class action litigation or an adverse judgment or settlement that is not insured or is in excess of insurance coverage could have a material adverse effect on our financial position and results of operations.
Our insurance policies may not provide adequate levels of coverage against all claims, and fluctuating insurance requirements and costs could negatively impact our profitability.
We carry insurance programs with specific retention levels or high per-claim deductibles for a significant portion of our risks and associated liabilities with respect to workers’ compensation, general liability, liquor liability, employment practices liability, property, health benefits, cyber security and other insurable risks. However, there are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure. These losses, if they occur, could have a material and adverse effect on our business and results of operations. Additionally, if our insurance costs increase, there can be no assurance that we will be able to successfully offset the effect of such increases and our results of operations may be adversely affected.
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Failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could adversely affect our business and financial results.
Effective internal control over financial reporting is necessary for us to provide accurate financial information. If we are unable to adequately maintain effective internal control over financial reporting, we may not be able to accurately report our financial results, which could cause investors to lose confidence in our reported financial information and negatively affect the trading price of our common stock. Furthermore, we cannot be certain that our internal control over financial reporting and disclosure controls and procedures will prevent all possible error and fraud, including through cyber attacks. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, in our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake, which could have an adverse impact on our business. A significant financial reporting failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and decline in the market price of our common stock, increase our costs, lead to litigation or result in negative publicity that could damage our reputation.
Future changes to existing accounting rules, accounting standards, new pronouncements and varying interpretations of pronouncements, or the questioning of current accounting practices may adversely affect our reported financial results. Additionally, our assumptions, estimates and judgments related to complex accounting matters could significantly affect our financial results. Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to, revenue recognition, impairment of long-lived assets, leases and related economic transactions, derivatives, intangibles, self-insurance, income taxes, property and equipment, unclaimed property laws and litigation, and stock-based compensation are highly complex and involve many subjective assumptions, estimates and judgments by us. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by us could significantly change our reported or expected financial performance.
Risks Related to Our Indebtedness
Our substantial leverage and our ability to refinance our indebtedness in the future could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and expose us to interest rate risk in connection with our variable-rate debt.
We are highly leveraged. As of December 30, 2018, our total indebtedness was $1.1 billion and we had $378.5 million in available unused borrowing capacity under our revolving credit facility, net of undrawn letters of credit of $22.0 million.
Our high degree of leverage could have important consequences, including:
• | making it more difficult for us to make payments on indebtedness; |
• | increasing our vulnerability to general economic, industry and competitive conditions and the various risks we face in our business; |
• | increasing our cost of borrowing; |
• | requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, dividend payments, share repurchases and future business opportunities; |
• | exposing us to the risk of increased interest rates because certain of our borrowings are at variable rates of interest; |
• | restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; |
• | limiting our ability to obtain additional financing for working capital, capital expenditures, restaurant development, debt service requirements, acquisitions and general corporate or other purposes; and |
• | limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who may not be as highly leveraged. |
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We may incur substantial additional indebtedness in the future, subject to the restrictions contained in our senior secured credit facilities (the “Senior Secured Credit Facility”). If new indebtedness is added to our current debt levels, the related risks that we now face could increase.
We had $1.1 billion of variable-rate debt outstanding under our Senior Secured Credit Facility as of December 30, 2018. We also have variable-to-fixed interest rate swap agreements with various counterparties to hedge a portion of the cash flows of our variable rate debt. Our active swap agreements have an aggregate notional amount of $400.0 million and mature on May 16, 2019. In October 2018, we entered into new swap agreements that have an aggregate notional amount of $550.0 million, a forward start date of May 16, 2019 and mature on November 30, 2022. While these agreements limit our exposure to higher interest rates, an increase in the floating rate could nonetheless cause a material increase in our interest expense due to the total amount of our outstanding variable rate indebtedness.
We cannot be certain that our financial condition or credit and other market conditions will be favorable when our Senior Secured Credit Facility matures in 2022, or at any earlier time we may seek to refinance our debt. If we are unable to refinance our indebtedness on favorable terms, our financial condition and results of operations would be adversely affected.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
Certain of our debt agreements limit our and our subsidiaries’ abilities to, among other things, incur or guarantee additional indebtedness, pay dividends on, redeem or repurchase our capital stock, make certain acquisitions or investments, incur or permit to exist certain liens, enter into transactions with affiliates or sell our assets to, merge or consolidate with or into, another company. Our debt agreements require us to satisfy certain financial tests and ratios. Our ability to satisfy such tests and ratios may be affected by events outside of our control.
If we breach the covenants under our debt agreements, the lenders could elect to declare all amounts outstanding under the agreements to be immediately due and payable and terminate all commitments to extend further credit. If we are unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our assets as collateral under our debt agreement. If our lenders accelerate the repayment of borrowings, we cannot be certain that we will have sufficient assets to repay them.
We may not be able to generate sufficient cash to service all of our indebtedness and operating lease obligations, and we may be forced to take other actions to satisfy our obligations under our indebtedness and operating lease obligations, which may not be successful. If we fail to meet these obligations, we would be in default under our debt agreements and the lenders could elect to declare all amounts outstanding under them to be immediately due and payable and terminate all commitments to extend further credit.
Our ability to make scheduled payments on our debt obligations and to satisfy our operating lease obligations depends upon our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to financial, business and other factors, many of which are beyond our control. We cannot be certain that we will maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, or to pay our operating lease obligations. If our cash flow and capital resources are insufficient to fund our debt service obligations and operating lease obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of sufficient operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations or take other actions to meet our debt service and other obligations. Our debt agreements restrict our ability to dispose of assets and how we may use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could otherwise realize from such dispositions and any such proceeds that are realized may not be adequate to meet any debt service obligations then due. The failure to meet our debt service obligations or the failure to remain in compliance with the financial covenants under our debt agreements would constitute an event of default under those agreements and the lenders
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could elect to declare all amounts outstanding under them to be immediately due and payable and terminate all commitments to extend further credit.
Risks Related to Our Common Stock
Our stock price is subject to volatility.
The stock market in general is highly volatile. As a result, the market price of our common stock is similarly volatile. The price of our common stock could be subject to wide fluctuations in response to a number of factors, some of which may be beyond our control. These factors include actual or anticipated fluctuations in our operating results, changes in or our ability to achieve estimates of our operating results by analysts, investors or management, analysts’ recommendations regarding our stock or our competitors’ stock, sales of substantial amounts of our common stock by our stockholders, actions or announcements by us or our competitors, the maintenance and growth of the value of our brands, litigation, legislation or other regulatory developments affecting us or our industry, natural disasters, cyber attacks, terrorist acts, war or other calamities and changes in general market and economic conditions.
If we are unable to continue to pay dividends or repurchase our stock, your investment in our common stock may decline in value.
In 2015, we initiated a quarterly dividend program. Our Board of Directors has also authorized several stock repurchase programs commencing in late 2014 and we have repurchased a significant amount of our stock since that time. The continuation of these programs, at all or consistent with past levels, will require the generation of sufficient cash flows and the existence of surplus earnings. Any decisions to declare and pay dividends and continue stock repurchase programs in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, financial condition, cash requirements, borrowing capacity, contractual restrictions including debt covenants and other factors that our Board of Directors may deem relevant at the time.
If we discontinue our dividend or stock repurchase programs, or reduce the amount of the dividends we pay or stock that we repurchase, the price of our common stock may fall. As a result, you may not be able to resell your shares at or above the price you paid for them.
Provisions in our certificate of incorporation and bylaws, our Senior Secured Credit Facility and Delaware law may discourage, delay or prevent a change of control of our company or changes in our management and, therefore, may depress the trading price of our stock.
Our certificate of incorporation and bylaws include certain provisions that could have the effect of discouraging, delaying or preventing a change of control of our company or changes in our management.
In addition, our Senior Secured Credit Facility includes change of control provisions that require that no stockholder or “group” within the meaning of Sections 13(d) and 14(d) of the Exchange Act has obtained more than 40% of our voting power.
These provisions may discourage, delay or prevent a transaction involving a change in control of the Company that is in the best interests of our stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts.
Section 203 of the Delaware General Corporation Law may affect the ability of an “interested stockholder” to engage in certain business combinations, including mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an “interested stockholder.” An “interested stockholder” is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of a corporation. Although we have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law our certificate of incorporation contains provisions that have the same effect as Section 203, except
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that they provide that our former private equity sponsors will not be deemed to be “interested stockholders,” regardless of the percentage of our voting stock owned by them, and accordingly will not be subject to such restrictions.
Our ability to raise capital in the future may be limited, which could make us unable to fund our capital requirements.
Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities, existing stockholders may experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.
Item 1B. Unresolved Staff Comments
Not applicable.
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Item 2. Properties
We lease substantially all of our restaurant sites from third parties. We had 1,490 system-wide restaurants located across the following states, territories or countries as of December 30, 2018:
COMPANY-OWNED | ||||||||||||||
U.S. | INTERNATIONAL | |||||||||||||
Alabama | 19 | Kentucky | 17 | Ohio | 48 | Brazil (1) | 112 | |||||||
Arizona | 13 | Louisiana | 23 | Oklahoma | 11 | China (Mainland) | 1 | |||||||
Arkansas | 11 | Maryland | 40 | Pennsylvania | 45 | Hong Kong | 12 | |||||||
California | 14 | Massachusetts | 15 | Rhode Island | 3 | |||||||||
Colorado | 14 | Michigan | 34 | South Carolina | 37 | |||||||||
Connecticut | 11 | Minnesota | 8 | South Dakota | 1 | |||||||||
Delaware | 4 | Mississippi | 1 | Tennessee | 36 | |||||||||
Florida | 222 | Missouri | 13 | Texas | 69 | |||||||||
Georgia | 48 | Nebraska | 7 | Utah | 1 | |||||||||
Hawaii | 6 | Nevada | 6 | Vermont | 1 | |||||||||
Illinois | 25 | New Hampshire | 3 | Virginia | 60 | |||||||||
Indiana | 23 | New Jersey | 39 | West Virginia | 8 | |||||||||
Iowa | 7 | New York | 41 | Wisconsin | 12 | |||||||||
Kansas | 7 | North Carolina | 65 | |||||||||||
Total U.S. company-owned | 1,068 | Total International company-owned | 125 | |||||||||||
FRANCHISE | ||||||||||||||
U.S. | INTERNATIONAL | |||||||||||||
Alabama | 1 | Montana | 3 | Australia | 8 | Malaysia | 2 | |||||||
Alaska | 1 | Nevada | 10 | Bahamas | 1 | Mexico | 5 | |||||||
Arizona | 14 | New Mexico | 5 | Brazil | 1 | Philippines | 4 | |||||||
California | 60 | Oregon | 6 | Canada | 2 | Puerto Rico | 4 | |||||||
Colorado | 16 | South Dakota | 1 | Costa Rica | 1 | Qatar | 1 | |||||||
Florida | 1 | Tennessee | 3 | Dominican Republic | 2 | Saudi Arabia | 5 | |||||||
Georgia | 1 | Utah | 5 | Ecuador | 1 | Singapore | 1 | |||||||
Idaho | 6 | Virginia | 1 | Guam | 1 | South Korea | 76 | |||||||
Kentucky | 1 | Washington | 20 | Indonesia | 4 | Thailand | 1 | |||||||
Mississippi | 7 | Wyoming | 2 | Japan | 10 | Turks and Caicos | 1 | |||||||
Total U.S. franchise | 164 | Total International franchise | 131 | |||||||||||
____________________
(1) | The restaurant count for Brazil is reported as of November 30, 2018 to correspond with the balance sheet date of this subsidiary. |
Following is a summary of the location and leased square footage for our corporate offices as of December 30, 2018:
LOCATION | USE | SQUARE FEET | LEASE EXPIRATION | ||||
Tampa, Florida | Corporate Headquarters | 168,000 | 1/31/2025 | ||||
São Paulo, Brazil | Brazil Operations Center | 17,000 | 7/31/2021 | ||||
Item 3. Legal Proceedings
For a description of our legal proceedings, see Note 19 - Commitments and Contingencies of the Notes to Consolidated Financial Statements of this Report.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
MARKET INFORMATION AND DIVIDENDS
Our common stock is listed on the Nasdaq Global Select Market under the symbol “BLMN”.
In 2014, our Board of Directors (our “Board”) adopted a dividend policy under which we have paid quarterly cash dividends on shares of our common stock since 2015. Future dividend payments will depend on earnings, financial condition, capital expenditure requirements, surplus and other factors that our Board considers relevant. The terms of our debt agreements permit regular quarterly dividend payments, subject to certain restrictions.
HOLDERS
As of February 15, 2019, there were 10 holders of record of our common stock. The number of registered holders does not include holders who are beneficial owners whose shares are held in street name by brokers and other nominees.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table presents the securities authorized for issuance under our equity compensation plans as of December 30, 2018:
(shares in thousands) | (a) | (b) | (c) | |||||||
PLAN CATEGORY | NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS | WEIGHTED-AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS | NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES REFLECTED IN COLUMN (a)) (1) | |||||||
Equity compensation plans approved by security holders | 6,190 | $ | 18.30 | 4,635 | ||||||
____________________
(1) | The shares remaining available for issuance may be issued in the form of stock options, restricted stock, restricted stock units or other stock awards under the 2016 Omnibus Incentive Compensation Plan. |
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STOCK PERFORMANCE GRAPH
The following graph depicts total return to stockholders from December 31, 2013 through December 30, 2018, relative to the performance of the Standard & Poor’s 500 Index and the Standard & Poor’s 500 Consumer Discretionary Sector, a peer group. The graph assumes an investment of $100 in our common stock and in each index on December 31, 2013 and the reinvestment of dividends paid since that date. The stock price performance shown in the graph is not necessarily indicative of future price performance.
DECEMBER 31, 2013 | DECEMBER 28, 2014 | DECEMBER 27, 2015 | DECEMBER 25, 2016 | DECEMBER 31, 2017 | DECEMBER 30, 2018 | ||||||||||||||||||
Bloomin’ Brands, Inc. (BLMN) | $ | 100.00 | $ | 98.92 | $ | 72.04 | $ | 78.18 | $ | 92.95 | $ | 77.93 | |||||||||||
Standard & Poor’s 500 | 100.00 | 115.29 | 116.17 | 130.42 | 157.17 | 148.98 | |||||||||||||||||
Standard & Poor’s Consumer Discretionary | 100.00 | 109.75 | 121.21 | 129.76 | 157.47 | 157.03 | |||||||||||||||||
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PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
The following table provides information regarding our purchases of common stock during the thirteen weeks ended December 30, 2018:
PERIOD | TOTAL NUMBER OF SHARES PURCHASED | AVERAGE PRICE PAID PER SHARE | TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS | APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (1) | ||||||||||
October 1, 2018 through October 28, 2018 | — | $ | — | — | $ | 51,032,265 | ||||||||
October 29, 2018 through November 25, 2018 | 691,066 | $ | 21.71 | 691,066 | $ | 36,032,538 | ||||||||
November 26, 2018 through December 30, 2018 | — | $ | — | — | $ | 36,032,538 | ||||||||
Total | 691,066 | 691,066 | ||||||||||||
____________________
(1) | On February 16, 2018, our Board of Directors authorized the repurchase of $150.0 million of our outstanding common stock as announced in our press release issued on February 22, 2018 (the “2018 Share Repurchase Program”). On February 12, 2019, our Board of Directors canceled the remaining $36.0 million of authorization under the 2018 Share Repurchase Program and approved a new $150.0 million authorization (the “2019 Share Repurchase Program”), as announced in our press release issued on February 14, 2019. The 2019 Share Repurchase Program will expire on August 12, 2020. |
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Item 6. Selected Financial Data
FISCAL YEAR | |||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
(in thousands, except share and per share data) | (Restated) (1) | (Restated) (1) | |||||||||||||||||
Operating Results: | |||||||||||||||||||
Revenues | |||||||||||||||||||
Restaurant sales | $ | 4,060,871 | $ | 4,164,063 | $ | 4,221,920 | $ | 4,349,921 | $ | 4,415,783 | |||||||||
Franchise and other revenues | 65,542 | 59,073 | 38,753 | 27,755 | 26,928 | ||||||||||||||
Total revenues (2) | $ | 4,126,413 | $ | 4,223,136 | $ | 4,260,673 | $ | 4,377,676 | $ | 4,442,711 | |||||||||
Income from operations (3) | $ | 145,253 | $ | 138,686 | $ | 123,750 | $ | 230,925 | $ | 191,964 | |||||||||
Net income including noncontrolling interests (3) (4) | $ | 109,538 | $ | 103,608 | $ | 43,987 | $ | 131,560 | $ | 95,926 | |||||||||
Net income attributable to Bloomin’ Brands (3) (4) | $ | 107,098 | $ | 101,293 | $ | 39,388 | $ | 127,327 | $ | 91,090 | |||||||||
Basic earnings per share | $ | 1.16 | $ | 1.05 | $ | 0.35 | $ | 1.04 | $ | 0.73 | |||||||||
Diluted earnings per share (5) | $ | 1.14 | $ | 1.02 | $ | 0.34 | $ | 1.01 | $ | 0.71 | |||||||||
Cash dividends declared per common share | $ | 0.36 | $ | 0.32 | $ | 0.28 | $ | 0.24 | $ | — | |||||||||
Balance Sheet Data: | |||||||||||||||||||
Total assets | $ | 2,464,774 | $ | 2,561,894 | $ | 2,622,810 | $ | 3,032,569 | $ | 3,338,240 | |||||||||
Total debt, net | $ | 1,094,775 | $ | 1,118,104 | $ | 1,089,485 | $ | 1,316,864 | $ | 1,309,797 | |||||||||
Total stockholders’ equity (1)(6) | $ | 54,817 | $ | 81,231 | $ | 226,063 | $ | 454,970 | $ | 556,449 | |||||||||
Common stock outstanding (6) | 91,272 | 91,913 | 103,922 | 119,215 | 125,950 | ||||||||||||||
Cash Flow Data: | |||||||||||||||||||
Investing activities: | |||||||||||||||||||
Capital expenditures | $ | (208,224 | ) | $ | (260,589 | ) | $ | (260,578 | ) | $ | (210,263 | ) | $ | (237,868 | ) | ||||
Proceeds from sale-leaseback transactions, net | 16,160 | 98,840 | 530,684 | — | — | ||||||||||||||
Financing activities: | |||||||||||||||||||
Repurchase of common stock (6) | $ | (113,967 | ) | $ | (272,916 | ) | $ | (310,334 | ) | $ | (170,769 | ) | $ | (930 | ) | ||||
Note: This selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto, included in Item 8 of this Report and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 of this Report.
(1) | See Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for details of the impact of implementing Accounting Standards Update No. 2014-09 “Revenue Recognition (Topic 606), Revenue from Contracts with Customers (“ASU No. 2014-09”). |
(2) | There were 53 operating weeks in 2017, versus 52 operating weeks for all other periods presented. This additional week resulted in an increase in Total revenues of $80.4 million during 2017. Due to the change in our fiscal year end in 2014, Total revenues for 2015 include $24.3 million of higher restaurant sales and Total revenues in 2014 include $46.0 million of lower restaurant sales. |
(3) | 2018 includes: (i) $29.5 million of asset impairments and closing costs primarily related to the restructuring of certain international markets, including Puerto Rico and China, certain approved closure and restructuring initiatives, reclassification of assets to held for sale in connection with refranchising certain restaurants and the restructuring of our Express concept, (ii) $8.6 million of asset impairments and restaurant closing costs related to the relocation of certain restaurants and (iii) $3.5 million of severance expense from the restructuring of certain functions. 2017 results include: (i) $42.8 million of asset impairments and closing costs primarily related to certain closure and restructuring initiatives, the remeasurement of certain surplus properties and for our China subsidiary, (ii) $12.5 million of asset impairments and restaurant closing costs related to the relocation of certain restaurants and (iii) $11.0 million of severance expense incurred as a result of a restructuring event. 2016 results include: (i) $51.4 million of asset impairments and closing costs related to certain closure and restructuring initiatives, (ii) $43.1 million of asset impairments related to the refranchising of Outback Steakhouse South Korea and for our Puerto Rico subsidiary, (iii) $7.2 million of asset impairments and restaurant closing costs related to the relocation of certain restaurants and (iv) $5.5 million of severance expense as a result of a restructuring event and the relocation of our Fleming’s operations center to the corporate home office. 2015 includes: $4.9 million of higher income from operations due to a change in our fiscal year end and $31.8 million of asset impairments and restaurant closing costs related to certain closure and restructuring initiatives. 2014 includes: (i) $9.2 million of lower income from operations due to a change in our fiscal year end, (ii) $26.8 million of asset impairments due to certain closure and restructuring initiatives, (iii) $24.0 million of asset impairments related to our Roy’s concept and corporate airplanes and (iv) $9.0 million of severance related to our organizational realignment. |
(4) | Includes $27.0 million in 2016 and $11.1 million in 2014 of loss on defeasance, extinguishment and modification of debt. |
(5) | Fiscal year 2017 includes $0.11 of additional diluted earnings per share from a 53rd operating week. |
(6) | During 2018, 2017, 2016 and 2015, we repurchased 5.1 million, 13.8 million, 16.6 million and 7.6 million shares, respectively, of our outstanding common stock. During 2018, we issued 4.0 million shares of our common stock through the exercise of stock options. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes.
Overview
We are one of the largest casual dining restaurant companies in the world with a portfolio of leading, differentiated restaurant concepts. As of December 30, 2018, we owned and operated 1,193 restaurants and franchised 297 restaurants across 48 states, Puerto Rico, Guam and 20 countries. We have four founder-inspired concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar.
Executive Summary
Our 2018 financial results include:
• | A decrease in total revenues of 2.3% to $4.1 billion in 2018 as compared to 2017, driven primarily by restaurant sales during the 53rd week of 2017, domestic refranchising and the effect of foreign currency translation. This decrease was partially offset by higher comparable restaurant sales and the net impact of restaurant openings and closures. |
• | Income from operations increased to $145.3 million in 2018 as compared to $138.7 million in 2017, primarily due to increases in average check per person, productivity initiatives, lower general and administrative expense, and lower impairment charges and restaurant closing costs. These increases were partially offset by commodity, labor and operating expense inflation, the impact of the 53rd week in 2017, increased rent expense and increased depreciation and amortization expense. |
Following is a summary of factors that impacted our operating results and liquidity in 2018 and significant actions we have taken during the year:
International Restructuring - During the thirteen weeks and fiscal year ended December 30, 2018, we recognized asset impairment and closure charges of $4.8 million and $13.9 million, respectively, related to restructuring of certain international markets, including Puerto Rico and China.
Express Concept Restructuring - During the thirteen weeks and fiscal year ended December 30, 2018, we recognized asset impairment of $7.4 million related to the restructuring of our Express concept. As a part of the restructuring, three Express locations closed in January 2019.
Assets Held for Sale - In December 2018, we signed a purchase agreement with a buyer to sell 18 of our existing U.S. Company-owned Carrabba’s Italian Grill locations for $3.6 million, less certain purchase price adjustments. In connection with the decision to sell these restaurants, we recognized impairment charges of $5.5 million. After the expected completion of the sale in the first half of 2019, these restaurant locations will be operated as franchises. See Note 4 - Disposals of the Notes to the Consolidated Financial Statements for further information.
Share Repurchase Programs and Dividends - We repurchased 5.1 million shares of common stock during 2018 for a total of $114.0 million and paid $33.3 million of dividends. On February 12, 2019, our Board canceled the remaining $36.0 million of authorization under the 2018 Share Repurchase Program and approved a new $150.0 million authorization. The 2019 Share Repurchase Program will expire on August 12, 2020.
33
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Impact of Political Unrest in Brazil
Recently, unrest in Brazil ahead of the October presidential election, including a truckers strike, resulted in lost operating days for many businesses, including our restaurants. We have already seen stronger trends in Brazil, including positive comparable restaurant sales in the fourth quarter of 2018 and believe consumer confidence will resume an upward trend in 2019.
Fiscal Year
We utilize a 52-53 week year ending on the last Sunday in December. In a 52 week fiscal year, each of our quarterly periods comprise 13 weeks. The additional operating week in a 53 week fiscal year is added to the fourth quarter. Fiscal year 2017 consisted of 53 weeks and fiscal years 2018 and 2016 consisted of 52 weeks. The additional operating week during fiscal year 2017 resulted in increases of $80.4 million of Total revenues and $0.11 of diluted earnings per share.
Business Strategies
In 2019, our key business strategies include:
• | Enhance the 360-Degree Customer Experience. We plan to continue to make investments to enhance our core guest experience, increase off-premises dining occasions, remodel and relocate restaurants, invest in digital marketing and data personalization and utilize the Dine Rewards loyalty program and multimedia marketing campaigns to drive traffic. |
• | Maximize International Opportunity. We continue to focus on existing geographic regions in South America, with strategic expansion in Brazil, and pursue global franchise opportunities. |
• | Drive Long-Term Shareholder Value. We plan to drive long-term shareholder value by reinvesting operational cash flow into our business, improving our credit profile and returning excess cash to shareholders through share repurchases and dividends. |
• | Enrich Engagement Among Stakeholders. We take the responsibility to our people, customers and communities seriously and continue to invest in programs that support the wellbeing of those engaged with us. |
We intend to fund our business strategies, drive revenue growth and margin improvement, in part by reinvesting savings generated by productivity initiatives across our businesses.
34
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Key Performance Indicators
Key measures that we use in evaluating our restaurants and assessing our business include the following:
• | Average restaurant unit volumes—average sales (excluding gift card breakage) per restaurant to measure changes in consumer traffic, pricing and development of the brand; |
• | Comparable restaurant sales—year-over-year comparison of sales volumes (excluding gift card breakage) for Company-owned restaurants that are open 18 months or more in order to remove the impact of new restaurant openings in comparing the operations of existing restaurants; |
• | System-wide sales—total restaurant sales volume for all Company-owned and franchise restaurants, regardless of ownership, to interpret the overall health of our brands; |
• | Restaurant-level operating margin, Income from operations, Net income and Diluted earnings per share — financial measures utilized to evaluate our operating performance. |
Restaurant-level operating margin is widely regarded in the industry as a useful metric to evaluate restaurant level operating efficiency and performance of ongoing restaurant-level operations, and we use it for these purposes, overall and particularly within our two segments. Our restaurant-level operating margin is expressed as the percentage of our Restaurant sales that Cost of sales, Labor and other related and Other restaurant operating expense (including advertising expenses) represent, in each case as such items are reflected in our Consolidated Statement of Operations. The following categories of our revenue and operating expenses are not included in restaurant-level operating margin because we do not consider them reflective of operating performance at the restaurant-level within a period:
(i) | Franchise and other revenues which are earned primarily from franchise royalties and other non-food and beverage revenue streams, such as rental and sublease income. |
(ii) | Depreciation and amortization which, although substantially all is related to restaurant-level assets, represent historical sunk costs rather than cash outlays for the restaurants. |
(iii) | General and administrative expense which includes primarily non-restaurant-level costs associated with support of the restaurants and other activities at our corporate offices. |
(iv) | Asset impairment charges and restaurant closing costs which are not reflective of ongoing restaurant performance in a period. |
Restaurant-level operating margin excludes various expenses, as discussed above, that are essential to support the operations of our restaurants and may materially impact our Consolidated Statement of Operations. As a result, restaurant-level operating margin is not indicative of our consolidated results of operations and is presented exclusively as a supplement to, and not a substitute for, net income or income from operations. In addition, our presentation of restaurant operating margin may not be comparable to similarly titled measures used by other companies in our industry;
• | Adjusted restaurant-level operating margin, Adjusted income from operations, Adjusted net income, Adjusted diluted earnings per share—non-GAAP financial measures utilized to evaluate our operating performance, which definitions, usefulness and reconciliations are described in more detail in the “Non-GAAP Financial Measures” section below; and |
• | Consumer satisfaction scores—measurement of our consumers’ experiences in a variety of key areas. |
35
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Selected Operating Data
The table below presents the number of our restaurants in operation at the end of the periods indicated:
DECEMBER 30, 2018 | DECEMBER 31, 2017 | DECEMBER 25, 2016 | ||||||
Number of restaurants (at end of the period): | ||||||||
U.S. | ||||||||
Outback Steakhouse | ||||||||
Company-owned (1) | 579 | 585 | 650 | |||||
Franchised (1) | 154 | 155 | 105 | |||||
Total | 733 | 740 | 755 | |||||
Carrabba’s Italian Grill | ||||||||
Company-owned (1) | 224 | 225 | 242 | |||||
Franchised (1) | 3 | 3 | 2 | |||||
Total | 227 | 228 | 244 | |||||
Bonefish Grill | ||||||||
Company-owned | 190 | 194 | 204 | |||||
Franchised | 7 | 7 | 6 | |||||
Total | 197 | 201 | 210 | |||||
Fleming’s Prime Steakhouse & Wine Bar | ||||||||
Company-owned | 70 | 69 | 68 | |||||
Other | ||||||||
Company-owned | 5 | 2 | — | |||||
U.S. Total | 1,232 | 1,240 | 1,277 | |||||
International | ||||||||
Company-owned | ||||||||
Outback Steakhouse - Brazil (2) | 92 | 87 | 83 | |||||
Other | 33 | 37 | 29 | |||||
Franchised | ||||||||
Outback Steakhouse - South Korea | 76 | 72 | 73 | |||||
Other | 55 | 53 | 54 | |||||
International Total | 256 | 249 | 239 | |||||
System-wide total | 1,488 | 1,489 | 1,516 | |||||
____________________
(1) | In 2017, we sold 53 Outback Steakhouse restaurants and one Carrabba’s Italian Grill restaurant, which are now operated as franchises. |
(2) | The restaurant counts for Brazil are reported as of November 30, 2018, 2017 and 2016, respectively, to correspond with the balance sheet dates of this subsidiary. |
36
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations
The following table sets forth, for the periods indicated, the percentages of certain items in our Consolidated Statements of Operations in relation to Total revenues or Restaurant sales, as indicated:
FISCAL YEAR | ||||||||
2018 | 2017 (1) | 2016 (1) | ||||||
Revenues | ||||||||
Restaurant sales | 98.4 | % | 98.6 | % | 99.1 | % | ||
Franchise and other revenues | 1.6 | 1.4 | 0.9 | |||||
Total revenues | 100.0 | 100.0 | 100.0 | |||||
Costs and expenses | ||||||||
Cost of sales (2) | 31.9 | 31.6 | 32.1 | |||||
Labor and other related (2) | 29.5 | 29.3 | 28.7 | |||||
Other restaurant operating (2) | 23.8 | 23.9 | 23.8 | |||||
Depreciation and amortization | 4.9 | 4.6 | 4.5 | |||||
General and administrative | 6.9 | 7.3 | 6.3 | |||||
Provision for impaired assets and restaurant closings | 0.9 | 1.2 | 2.5 | |||||
Total costs and expenses | 96.5 | 96.7 | 97.1 | |||||
Income from operations | 3.5 | 3.3 | 2.9 | |||||
Loss on defeasance, extinguishment and modification of debt | — | (*) | (0.6 | ) | ||||
Other (expense) income, net | (*) | 0.4 | * | |||||
Interest expense, net | (1.1 | ) | (1.1 | ) | (1.1 | ) | ||
Income before benefit for income taxes | 2.4 | 2.6 | 1.2 | |||||
(Benefit) provision for income taxes | (0.3 | ) | 0.1 | 0.2 | ||||
Net income | 2.7 | 2.5 | 1.0 | |||||
Less: net income attributable to noncontrolling interests | 0.1 | 0.1 | 0.1 | |||||
Net income attributable to Bloomin’ Brands | 2.6 | % | 2.4 | % | 0.9 | % | ||
____________________
(1) | See Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for details of the impact of implementing ASU No. 2014-09. |
(2) | As a percentage of Restaurant sales. |
* | Less than 1/10th of one percent of Total revenues. |
37
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Revenues
RESTAURANT SALES
Following is a summary of the change in Restaurant sales for the periods indicated:
FISCAL YEAR | |||||||
(dollars in millions): | 2018 | 2017 (1) | |||||
For fiscal years 2017 and 2016 (1) | $ | 4,164.1 | $ | 4,221.9 | |||
Change from: | |||||||
Impact of the 53rd week in 2017 | (79.9 | ) | 79.9 | ||||
Divestiture of restaurants through refranchising transactions | (64.4 | ) | (209.4 | ) | |||
Effect of foreign currency translation | (43.7 | ) | 36.0 | ||||
Restaurant closings | (42.7 | ) | (84.3 | ) | |||
Comparable restaurant sales (2) | 68.3 | 45.9 | |||||
Restaurant openings (2) | 59.2 | 74.1 | |||||
For fiscal years 2018 and 2017 | $ | 4,060.9 | $ | 4,164.1 | |||
____________________
(1) | Restaurant sales have been restated for 2017 and 2016. See Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for details of the impact of implementing ASU No. 2014-09. |
(2) | Summation of quarterly changes for restaurant openings and comparable restaurant sales will not total to annual amounts as the restaurants that meet the definition of a comparable restaurant will differ each period based on when the restaurant opened. |
The decrease in Restaurant sales in 2018 as compared to 2017 was primarily due to: (i) restaurant sales during the 53rd week of 2017, (ii) domestic refranchising in 2017, (iii) the effect of foreign currency translation, due to the depreciation of the Brazilian Real and (iv) the closing of 65 restaurants since December 25, 2016. The decrease in Restaurant sales was partially offset by higher comparable restaurant sales and sales from 49 new restaurants not included in our comparable restaurant sales base.
The decrease in Restaurant sales in 2017 as compared to 2016 was primarily due to refranchising internationally and domestically and the closing of 57 restaurants since December 27, 2015. The decrease in Restaurant sales was partially offset by: (i) restaurant sales during the 53rd week of 2017, (ii) sales from 69 new restaurants not included in our comparable restaurant sales base, (iii) higher comparable restaurant sales and (iv) the effect of foreign currency translation, due to the appreciation of the Brazilian Real.
38
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Average Restaurant Unit Volumes and Operating Weeks
Following is a summary of the average restaurant unit volumes and operating weeks, for the periods indicated:
FISCAL YEAR | |||||||||||
2018 | 2017 | 2016 | |||||||||
(dollars in thousands) | (Restated) (1) | (Restated) (1) | |||||||||
Average restaurant unit volumes: | |||||||||||
U.S. | |||||||||||
Outback Steakhouse | $ | 3,580 | $ | 3,514 | $ | 3,329 | |||||
Carrabba’s Italian Grill | $ | 2,887 | $ | 2,946 | $ | 2,845 | |||||
Bonefish Grill | $ | 3,012 | $ | 3,058 | $ | 2,991 | |||||
Fleming’s Prime Steakhouse & Wine Bar | $ | 4,358 | $ | 4,390 | $ | 4,221 | |||||
International | |||||||||||
Outback Steakhouse - Brazil (2) | $ | 3,856 | $ | 4,429 | $ | 3,856 | |||||
Operating weeks: | |||||||||||
U.S. | |||||||||||
Outback Steakhouse | 30,265 | 31,969 | 33,812 | ||||||||
Carrabba’s Italian Grill | 11,660 | 12,125 | 12,658 | ||||||||
Bonefish Grill | 9,981 | 10,411 | 10,667 | ||||||||
Fleming’s Prime Steakhouse & Wine Bar | 3,628 | 3,585 | 3,469 | ||||||||
International | |||||||||||
Outback Steakhouse - Brazil | 4,711 | 4,441 | 4,096 | ||||||||
____________________
(1) | Restaurant sales have been restated for 2017 and 2016. See Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for details of the impact of implementing ASU No. 2014-09. |
(2) | Translated at average exchange rates of 3.59, 3.20 and 3.50 for 2018, 2017 and 2016, respectively. |
39
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Comparable Restaurant Sales, Traffic and Average Check Per Person Increases (Decreases)
Following is a summary of comparable restaurant sales, traffic and average check per person increases (decreases), for the periods indicated:
FISCAL YEAR | ||||||||
2018 (1) | 2017 (2) | 2016 | ||||||
Year over year percentage change: | ||||||||
Comparable restaurant sales (stores open 18 months or more) (3): | ||||||||
U.S. | ||||||||
Outback Steakhouse | 4.0 | % | 1.8 | % | (2.3 | )% | ||
Carrabba’s Italian Grill | 0.2 | % | (1.2 | )% | (2.7 | )% | ||
Bonefish Grill | 0.5 | % | (1.7 | )% | (0.5 | )% | ||
Fleming’s Prime Steakhouse & Wine Bar | 0.8 | % | (0.4 | )% | (0.2 | )% | ||
Combined U.S. | 2.5 | % | 0.5 | % | (1.9 | )% | ||
International | ||||||||
Outback Steakhouse - Brazil (4) | (1.5 | )% | 6.3 | % | 6.7 | % | ||
Traffic: | ||||||||
U.S. | ||||||||
Outback Steakhouse | 0.9 | % | 0.3 | % | (5.7 | )% | ||
Carrabba’s Italian Grill | (4.1 | )% | (4.2 | )% | (2.7 | )% | ||
Bonefish Grill | (2.6 | )% | (2.8 | )% | (3.7 | )% | ||
Fleming’s Prime Steakhouse & Wine Bar | (4.3 | )% | (5.5 | )% | (2.2 | )% | ||
Combined U.S. | (0.8 | )% | (1.3 | )% | (4.7 | )% | ||
International | ||||||||
Outback Steakhouse - Brazil | (4.4 | )% | (0.2 | )% | 0.2 | % | ||
Average check per person increases (5): | ||||||||
U.S. | ||||||||
Outback Steakhouse | 3.1 | % | 1.5 | % | 3.4 | % | ||
Carrabba’s Italian Grill | 4.3 | % | 3.0 | % | — | % | ||
Bonefish Grill | 3.1 | % | 1.1 | % | 3.2 | % | ||
Fleming’s Prime Steakhouse & Wine Bar | 5.1 | % | 5.1 | % | 2.0 | % | ||
Combined U.S. | 3.3 | % | 1.8 | % | 2.8 | % | ||
International | ||||||||
Outback Steakhouse - Brazil | 2.8 | % | 6.3 | % | 6.5 | % | ||
____________________
(1) | For 2018, U.S. comparable restaurant sales compare the 52 weeks from January 1, 2018 through December 30, 2018 to the 52 weeks from January 2, 2017 through December 31, 2017. |
(2) | For 2017, U.S. comparable restaurant sales compare the 53 weeks from December 26, 2016 through December 31, 2017 to the 53 weeks from December 28, 2015 through January 1, 2017. |
(3) | Comparable restaurant sales exclude the effect of fluctuations in foreign currency rates. Relocated international restaurants closed more than 30 days and relocated U.S. restaurants closed more than 60 days are excluded from comparable restaurant sales until at least 18 months after reopening. |
(4) | Includes trading day impact from calendar period reporting. |
(5) | Average check per person increases includes the impact of menu pricing changes, product mix and discounts. |
40
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Franchise and other revenues
FISCAL YEAR | |||||||||||
2018 | 2017 | 2016 | |||||||||
(dollars in millions) | (Restated) (1) | (Restated) (1) | |||||||||
Franchise revenues (2) | $ | 52.9 | $ | 47.0 | $ | 32.3 | |||||
Other revenues | 12.6 | 12.1 | 6.5 | ||||||||
Franchise and other revenues | $ | 65.5 | $ | 59.1 | $ | 38.8 | |||||
____________________
(1) | See Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for details of the impact of implementing ASU No. 2014-09. |
(2) | Represents franchise royalties, advertising fees and initial franchise fees. |
COSTS AND EXPENSES
Cost of sales
FISCAL YEAR | FISCAL YEAR | ||||||||||||||||||||
(dollars in millions): | 2018 | 2017 | Change | 2017 | 2016 | Change | |||||||||||||||
Cost of sales | $ | 1,295.6 | $ | 1,317.1 | $ | 1,317.1 | $ | 1,354.9 | |||||||||||||
% of Restaurant sales | 31.9 | % | 31.6 | % | 0.3 | % | 31.6 | % | 32.1 | % | (0.5 | )% | |||||||||
Cost of sales, consisting of food and beverage costs, increased as a percentage of Restaurant sales in 2018 as compared to 2017 primarily due to 0.8% from higher beef and other commodity costs, partially offset by decreases as a percentage of Restaurant sales primarily due to 0.7% from increases in average check per person.
Cost of sales decreased as a percentage of Restaurant sales in 2017 as compared to 2016 was primarily due to: (i) 0.4% from increases in average check per person, (ii) 0.4% from lower beef costs and (iii) 0.3% from the impact of certain cost savings initiatives. These decreases were partially offset by increases as a percentage of Restaurant sales primarily due to 0.5% from higher other commodity costs.
In 2019, we expect commodity costs to increase approximately 2%.
Labor and other related expenses
FISCAL YEAR | FISCAL YEAR | ||||||||||||||||||||
(dollars in millions): | 2018 | 2017 | Change | 2017 | 2016 | Change | |||||||||||||||
Labor and other related | $ | 1,197.3 | $ | 1,219.6 | $ | 1,219.6 | $ | 1,211.3 | |||||||||||||
% of Restaurant sales | 29.5 | % | 29.3 | % | 0.2 | % | 29.3 | % | 28.7 | % | 0.6 | % | |||||||||
Labor and other related expenses include all direct and indirect labor costs incurred in operations, including distribution expense to Restaurant Managing Partners, costs related to field deferred compensation plans and other field incentive compensation expenses. Labor and other related expenses increased as a percentage of Restaurant sales for 2018 as compared to 2017 primarily due to 1.0% from wage rate increases. This increase was partially offset by decreases as a percentage of Restaurant sales primarily due to 0.5% from increases in average check per person and 0.3% impact from certain cost savings initiatives.
Labor and other related expenses increased as a percentage of Restaurant sales for 2017 as compared to 2016 primarily due to 1.5% of higher kitchen and service labor costs due to higher wage rates and investments in our service model. This increase was partially offset by decreases as a percentage of Restaurant sales primarily due to 0.6% from increases in average check per person and 0.2% impact from the refranchising of Outback Steakhouse South Korea in 2016.
41
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
In 2019, we anticipate approximately 4% labor cost inflation.
Other restaurant operating expenses
FISCAL YEAR | FISCAL YEAR | ||||||||||||||||||||
2018 | 2017 | 2017 | 2016 | ||||||||||||||||||
(dollars in millions): | (Restated) (1) | Change | (Restated) (1) | (Restated) (1) | Change | ||||||||||||||||
Other restaurant operating | $ | 967.1 | $ | 996.2 | $ | 996.2 | $ | 1,004.4 | |||||||||||||
% of Restaurant sales | 23.8 | % | 23.9 | % | (0.1 | )% | 23.9 | % | 23.8 | % | 0.1 | % | |||||||||
____________________
(1) | See Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for details of the impact of implementing ASU No. 2014-09. |
Other restaurant operating expenses include certain unit-level operating costs such as operating supplies, rent, repairs and maintenance, advertising expenses, utilities, pre-opening costs and other occupancy costs. A substantial portion of these expenses is fixed or indirectly variable. Other restaurant operating expenses decreased as a percentage of Restaurant sales for 2018 as compared to 2017 primarily due to: (i) 0.3% from the impact of certain cost savings initiatives, (ii) 0.2% from increases in average check per person and (iii) 0.1% from lower advertising expense. These decreases were partially offset by increases as a percentage of Restaurant sales primarily due to 0.3% from operating expense inflation and 0.2% from higher rent expense.
Other restaurant operating expenses increased for 2017 as compared to 2016 and was the result of increases as a percentage of Restaurant sales primarily due to 0.5% from operating expense inflation and 0.3% from higher rent expense due to the sale-leaseback of certain properties. These increases were partially offset by a decrease as a percentage of Restaurant sales primarily due to 0.6% from lower advertising expenses and 0.2% from the impact of certain cost savings initiatives.
Depreciation and amortization
FISCAL YEAR | FISCAL YEAR | ||||||||||||||||||||||
(dollars in millions): | 2018 | 2017 | Change | 2017 | 2016 | Change | |||||||||||||||||
Depreciation and amortization | $ | 201.6 | $ | 192.3 | $ | 9.3 | $ | 192.3 | $ | 193.8 | $ | (1.5 | ) | ||||||||||
Depreciation and amortization increased for 2018 as compared to 2017 primarily due to additional depreciation expense related to restaurant openings and relocations, and technology projects. These increases were partially offset by the impact of: (i) fewer remodeled restaurants, (ii) domestic refranchising and (iii) assets impaired in connection with international restructuring in 2017.
Depreciation and amortization decreased for 2017 as compared to 2016 primarily due to: (i) disposal of assets related to the sale-leaseback of certain properties, (ii) refranchising internationally and domestically and (iii) assets impaired in connection with the 2017 Closure Initiative (as defined below), partially offset by additional depreciation expense related to the opening of new restaurants and the relocation or remodel of our existing restaurants.
42
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
General and administrative expenses
General and administrative expense includes salaries and benefits, management incentive programs, related payroll tax and benefits, other employee-related costs and professional services. Following is a summary of the changes in General and administrative expense for the periods indicated below:
FISCAL YEAR | |||||||
(dollars in millions): | 2018 | 2017 | |||||
For fiscal years 2017 and 2016 | $ | 307.0 | $ | 268.0 | |||
Change from: | |||||||
Compensation, benefits and payroll tax | (8.7 | ) | (4.9 | ) | |||
Severance | (7.2 | ) | 4.4 | ||||
Incentive compensation (1) | (6.9 | ) | 23.0 | ||||
Foreign currency exchange | (2.6 | ) | 2.6 | ||||
Computer expense | 3.0 | 1.7 | |||||
Life insurance and deferred compensation | 0.7 | 2.8 | |||||
Legal and professional fees | 0.5 | 5.9 | |||||
Other | (3.1 | ) | 3.5 | ||||
For fiscal years 2018 and 2017 | $ | 282.7 | $ | 307.0 | |||
____________________
(1) | Includes retention compensation and excludes stock-based compensation. |
Provision for impaired assets and restaurant closings
FISCAL YEAR | FISCAL YEAR | ||||||||||||||||||||||
(dollars in millions): | 2018 | 2017 | Change | 2017 | 2016 | Change | |||||||||||||||||
Provision for impaired assets and restaurant closings | $ | 36.9 | $ | 52.3 | $ | (15.4 | ) | $ | 52.3 | $ | 104.6 | $ | (52.3 | ) | |||||||||
Restructuring and Closure Initiatives - Following is a summary of expenses related to the 2017 Closure Initiative and Bonefish Restructuring (the “Closure Initiatives”) recognized in Provision for impaired assets and restaurant closings in our Consolidated Statements of Operations and Comprehensive Income for the periods indicated:
FISCAL YEAR | |||||||||||
(dollars in millions) | 2018 | 2017 | 2016 | ||||||||
Impairment, facility closure and other expenses | |||||||||||
2017 Closure Initiative (1) | $ | 1.7 | $ | 20.4 | $ | 46.5 | |||||
Bonefish Restructuring (2) | 1.4 | 3.8 | 4.9 | ||||||||
Impairment, facility closure and other expenses for Closure Initiatives | $ | 3.1 | $ | 24.2 | $ | 51.4 | |||||
________________
(1) | In February and August 2017, we decided to close 43 underperforming restaurants in the U.S. and two Abbraccio restaurants outside of the core markets of São Paulo and Rio de Janeiro in Brazil (the “2017 Closure Initiative”). |
(2) | In February 2016, we decided to close 14 Bonefish restaurants (the “Bonefish Restructuring”). |
International Restructuring - During the thirteen weeks and fiscal year ended December 30, 2018, we recognized asset impairment and closure charges of $4.8 million and $13.9 million, respectively, related to restructuring of certain international markets, including Puerto Rico and China, within the International segment. During 2017, we recognized asset impairment and closure charges of $6.3 million related to restructuring of our China subsidiary, within the International segment.
43
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Express Concept Restructuring - During the thirteen weeks and fiscal year ended December 30, 2018, we recognized asset impairment of $7.4 million related to the restructuring of our Express concept, within the U.S. segment. As a part of the restructuring, three Express locations closed in January 2019.
Refranchising - In December 2018, we entered into an agreement to sell certain existing U.S. Company-owned Carrabba’s Italian Grill locations. In connection with the decision to sell these restaurants, we recognized impairment charges of $5.5 million during the thirteen weeks and fiscal year ended December 30, 2018, within the U.S. segment.
Surplus Properties - During 2017, we recognized impairment charges of $10.7 million in connection with the remeasurement of certain surplus properties currently leased to the owners of our former restaurant concepts, within the U.S. segment.
Sale of Outback Steakhouse South Korea - In connection with the decision to sell Outback Steakhouse South Korea, we recognized an impairment charge of $39.6 million during 2016, within the International segment.
Other Impairments - During 2016, we recognized impairment charges of $3.5 million for our Puerto Rico subsidiary, within the U.S. segment.
The remaining restaurant impairment and closing charges primarily resulted from locations identified for remodel, relocation, sale or closure and lease liabilities.
Income from operations
FISCAL YEAR | FISCAL YEAR | ||||||||||||||||||||
2018 | 2017 | 2017 | 2016 | ||||||||||||||||||
(dollars in millions): | (Restated) (1) | Change | (Restated) (1) | (Restated) (1) | Change | ||||||||||||||||
Income from operations | $ | 145.3 | $ | 138.7 | $ | 138.7 | $ | 123.8 | |||||||||||||
% of Total revenues | 3.5 | % | 3.3 | % | 0.2 | % | 3.3 | % | 2.9 | % | 0.4 | % | |||||||||
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(1) | See Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for details of the impact of implementing ASU No. 2014-09. |
The increase in income from operations during 2018 as compared to 2017 was primarily due to: (i) increases in average check per person, (ii) the impact of certain cost saving initiatives, (iii) lower general and administrative expense and (iv) lower impairment charges and restaurant closing costs. These increases were partially offset by: (i) commodity, labor and operating expense inflation, (ii) the impact of the 53rd week in 2017, (iii) increased rent expense and (iv) higher depreciation and amortization expense.
The increase in income from operations during 2017 as compared to 2016 was primarily due to lower impairment charges, primarily related to the 2017 Closure Initiative and refranchising of Outback Steakhouse South Korea in 2016, the impact of the 53rd week in 2017, increases in franchise and other revenues and increases in average check per person. These increases were partially offset by higher general and administrative expense and labor costs.
Loss on defeasance, extinguishment and modification of debt
We recognized losses on defeasance, extinguishment and modification of debt in connection with defeasance of the 2012 CMBS loan in 2016, the amendment of our mortgage loan in 2016 and refinancing of our Senior Secured Credit Facility in 2017.
44
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Other (expense) income, net
Other (expense) income, net, includes items deemed to be non-operating based on management’s assessment of the nature of the item in relation to our core operations. We recorded Other (expense) income primarily in connection with gains on sale of 55 of our U.S. Company-owned locations in 2017 and gain on refranchising of Outback Steakhouse South Korea in 2016.
We continue to pursue refranchising opportunities in select markets as we look to further optimize our restaurant portfolio. As a result of these transactions, we may record future net gains or losses, impairment charges and transaction related expenses.
Interest expense, net
FISCAL YEAR | FISCAL YEAR | ||||||||||||||||||||||
(dollars in millions): | 2018 | 2017 | Change | 2017 | 2016 | Change | |||||||||||||||||
Interest expense, net | $ | 44.9 | $ | 41.4 | $ | 3.5 | $ | ||||||||||||||||