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BBRG > SEC Filings for BBRG > Form 10-Q on 30-Apr-2013All Recent SEC Filings

Show all filings for BRAVO BRIO RESTAURANT GROUP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BRAVO BRIO RESTAURANT GROUP, INC.


30-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read this discussion together with our unaudited consolidated financial statements and accompanying condensed notes. Unless indicated otherwise, any reference in this report to the "Company," "we," "us," and "our" refer to Bravo Brio Restaurant Group, Inc. together with its subsidiaries.

This discussion contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "should" or "will" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors, including those discussed under the heading "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 30, 2012 filed with the SEC on March 5, 2013 (the "2012 Annual Report on Form 10-K").

Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements. We assume no obligation to provide revisions to any forward-looking statements should circumstances change.

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our 2012 Annual Report on Form 10-K and the unaudited consolidated financial statements and the related condensed notes thereto included herein.

Overview

We are a leading owner and operator of two distinct Italian restaurant brands, BRAVO! Cucina Italiana ("BRAVO!") and BRIO Tuscan Grille ("BRIO"), which for purposes of the following discussion includes our one Bon Vie restaurant. We have positioned our brands as multifaceted culinary destinations that deliver the ambiance, design elements and food quality reminiscent of fine dining restaurants at a value typically offered by casual dining establishments, a combination known as the upscale affordable dining segment. Each of our brands provides its guests with a fine dining experience and value by serving affordable cuisine prepared using fresh flavorful ingredients and authentic Italian cooking methods, combined with attentive service in an attractive, lively atmosphere. We strive to be the best Italian restaurant company in America and are focused on providing our guests an excellent dining experience through consistency of execution.

Our business is highly sensitive to changes in guest traffic. Increases and decreases in guest traffic can have a significant impact on our financial results. In recent years, we have faced and we continue to face uncertain economic conditions, which have resulted in changes to our guests' discretionary spending. To adjust to this decrease in guest spending, we have focused on controlling product margins and costs while maintaining our high standards for food quality and service and enhancing our guests' dining experience. We have worked with our distributors and suppliers to control commodity costs, become more efficient with the use of our employee base and found new ways to improve efficiencies across our company. We have increased our electronic advertising, social media communication and public relations activities in order to bring new guests to our restaurants and keep loyal guests coming back to grow our revenues. Additionally, we have focused resources on highlighting our menu items and promoting our non-entrée selections such as appetizers, desserts and beverages as part of our efforts to drive higher sales volumes at our restaurants.

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Table of Contents

Results of Operations

Thirteen Weeks Ended March 31, 2013 Compared to the Thirteen Weeks Ended
March 25, 2012

The following table sets forth, for the periods indicated, our consolidated
statements of operations both on an actual basis and expressed as percentages of
revenue.



                                                                     Thirteen Weeks Ended
                                      March 31,         % of          March 25,         % of                         %
                                         2013         Revenues          2012          Revenues       Change       Change
                                                                    (dollars in thousands)
Revenues                              $  103,063            100 %    $    98,377            100 %    $ 4,686          4.8 %
Cost and expenses:
Cost of sales                             26,964           26.2 %         25,637           26.1 %      1,327          5.2 %
Labor                                     36,582           35.5 %         34,155           34.7 %      2,427          7.1 %
Operating                                 16,120           15.6 %         14,899           15.1 %      1,221          8.2 %
Occupancy                                  6,835            6.6 %          6,490            6.6 %        345          5.3 %
General and administrative expenses        5,859            5.7 %          5,697            5.8 %        162          2.8 %
Restaurant preopening costs                  701            0.7 %          1,362            1.4 %       (661 )      (48.5 )%
Depreciation and amortization              4,869            4.7 %          4,413            4.5 %        456         10.3 %

Total costs and expenses                  97,930           95.0 %         92,653           94.2 %      5,277          5.7 %

Income from operations                     5,133            5.0 %          5,724            5.8 %       (591 )      (10.3 )%
Net interest expense                         317            0.3 %            354            0.4 %        (37 )      (10.5 )%

Income before income taxes                 4,816            4.7 %          5,370            5.5 %       (554 )      (10.3 )%
Income tax expense                         1,397            1.4 %          1,611            1.6 %       (214 )      (13.3 )%

Net income                            $    3,419            3.3 %    $     3,759            3.8 %    $  (340 )       (9.0 )%

Certain percentage amounts may not sum due to rounding.

Revenues. Revenues increased $4.7 million, or 4.8%, to $103.1 million for the thirteen weeks ended March 31, 2013, as compared to $98.4 million for the thirteen weeks ended March 25, 2012. The increase of $4.7 million was primarily due to an additional 112 operating weeks provided by nine company owned restaurants opened in 2012 and two new restaurants opened in the first quarter of 2013. Partially offsetting the increase in operating weeks was a decrease in comparable restaurant revenues of 2.5% or $2.2 million, which was driven by a 3.4% decrease in guest counts that decreased comparable revenues by $3.1 million, and partially offset by an increase of 0.9% in average check. Our comparable restaurant revenues were negatively impacted by approximately 2.0% due to the shift in our operating calendar as a result of the fifty-third week in fiscal 2012. We consider a restaurant to be part of the comparable revenue base in the first full quarter following the eighteenth month of operations. Additionally, during the second quarter of 2012, we opened one BRIO that we do not own but which we operate pursuant to a management agreement under which we receive a management fee. Other than our receipt of this management fee, the operation of this restaurant has no impact on our financial statements.

For our BRAVO! brand, restaurant revenues decreased $0.1 million, or 0.2%, to $40.2 million for the thirteen weeks ended March 31, 2013 as compared to $40.3 million for the thirteen weeks ended March 25, 2012. Comparable revenues for the BRAVO! brand restaurants decreased 1.6%, or $0.6 million, to $38.3 million for the thirteen weeks ended March 31, 2013 as compared to $38.9 million for the thirteen weeks ended March 25, 2012. Revenues for BRAVO! brand restaurants not included in the comparable revenue base increased $0.5 million to $1.9 million for the thirteen weeks ended March 31, 2013. At March 31, 2013, there were 45 BRAVO! restaurants included in the comparable revenue base and two BRAVO! restaurants not included in the comparable revenue base.

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For our BRIO brand, restaurant revenues increased $4.7 million, or 8.2%, to $62.8 million for the thirteen weeks ended March 31, 2013 as compared to $58.1 million for the thirteen weeks ended March 25, 2012. Comparable revenues for the BRIO brand restaurants decreased 3.2%, or $1.6 million, to $50.3 million for the thirteen weeks ended March 31, 2013 as compared to $51.9 million for the thirteen weeks ended March 25, 2012. Revenues for BRIO brand restaurants not included in the comparable revenue base increased $6.4 million to $12.5 million for the thirteen weeks ended March 31, 2013. At March 31, 2013, there were 41 BRIO restaurants included in the comparable revenue base and fourteen BRIO restaurants not included in the comparable revenue base.

Cost of Sales. Cost of sales increased approximately $1.4 million, or 5.2%, to $27.0 million for the thirteen weeks ended March 31, 2013, as compared to $25.6 million for the thirteen weeks ended March 25, 2012. As a percentage of revenues, cost of sales increased to 26.2% for the thirteen weeks ended March 31, 2013, from 26.1% for the thirteen weeks ended March 25, 2012. The increase in cost of sales, as a percentage of revenues, was primarily the result of higher commodity costs for our produce in 2013 as compared to 2012, partially offset by a menu price increase. As a percentage of revenues, food costs increased 0.1% to 21.4% and increased in total dollars by $1.1 million. Beverage costs remained flat as a percentage of revenues at 4.8% but increased in total dollars by $0.3 million. The increase in these costs in total dollars was related to the growth in restaurants in 2013 due to nine company owned restaurant openings in 2012 and two restaurant openings in the thirteen weeks ended March 31, 2013.

Labor Costs. Labor costs increased $2.4 million, or 7.1%, to $36.6 million for the thirteen weeks ended March 31, 2013, as compared to $34.2 million for the thirteen weeks ended March 25, 2012. As a percentage of revenues, labor costs increased to 35.5% for the thirteen weeks ended March 31, 2013, from 34.7% for the thirteen weeks ended March 25, 2012. These increases were primarily the result of deleveraging from the decrease in our comparable revenues as well as labor inefficiencies associated with the nine company owned restaurants opened in 2012 and two new restaurants opened in the first quarter of 2013.

Operating Costs. Operating costs increased $1.2 million, or 8.2%, to $16.1 million for the thirteen weeks ended March 31, 2013, as compared to $14.9 million for the thirteen weeks ended March 25, 2012. This increase was mainly due to an additional 112 operating weeks in 2013 as compared to 2012 resulting from the nine company owned restaurants opened in 2012 and two restaurants opened in the first quarter of 2013. As a percentage of revenues, operating costs increased to 15.6% for the thirteen weeks ended March 31, 2013, compared to 15.1% for the thirteen weeks ended March 25, 2012. The increase as a percentage of revenues was primarily related to higher supply costs, janitorial services and utility costs due to negative leverage from the decrease in comparable sales in the first quarter of 2013 as compared to the prior year period.

Occupancy Costs. Occupancy costs increased $0.3 million, or 5.3%, to $6.8 million for the thirteen weeks ended March 31, 2013, as compared to $6.5 million for the thirteen weeks ended March 25, 2012. The increase was due to nine company owned restaurants opened in 2012 and two new restaurants opened in the first thirteen weeks of 2013. As a percentage of revenues, occupancy costs remained flat at 6.6% for the thirteen weeks ended March 31, 2013 and March 25, 2012.

General and Administrative. General and administrative expenses increased by $0.2 million, or 2.8%, to $5.9 million for the thirteen weeks ended March 31, 2013, as compared to $5.7 million for the thirteen weeks ended March 25, 2012. The increase in expenses was attributable to higher stock compensation costs due to stock grants in 2012 and 2013. As a percentage of revenues, general and administrative expenses decreased to 5.7% for the thirteen weeks ended March 31, 2013, from 5.8% for the thirteen weeks ended March 25, 2012. The decrease was primarily attributable to the leverage gained by the 4.8% increase in revenues in the first quarter of 2013 as compared to the first quarter of 2012.

Restaurant Pre-opening Costs. Pre-opening costs decreased by approximately $0.7 million, to $0.7 million for the thirteen weeks ended March 31, 2013, as compared to $1.4 million for the thirteen weeks ended March 25, 2012. Year over year changes in pre-opening costs are driven by the timing and number of restaurant openings in a given period. During the first thirteen weeks of 2013, we opened two restaurants and had one additional restaurant under construction. During the first thirteen weeks of 2012, we opened three restaurants and had two additional restaurants under construction.

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Depreciation and Amortization. Depreciation and amortization expenses increased $0.5 million, to $4.9 million for the thirteen weeks ended March 31, 2013 compared to $4.4 million for the thirteen weeks ended March 25, 2012. As a percentage of revenues, depreciation and amortization expenses increased to 4.7% for the thirteen weeks ended March 31, 2013 as compared to 4.5% for the thirteen weeks ended March 25, 2012.

Net Interest Expense. Net interest expense decreased $0.1 million to $0.3 million for the thirteen weeks ended March 31, 2013 as compared to $0.4 million for the thirteen weeks ended March 25, 2012. This decrease was due to lower average outstanding debt during the first thirteen weeks of 2013 compared to the same period in the prior year.

Income Taxes. Income tax expense was $1.4 million, or 29% of income before income taxes, for the thirteen weeks ended March 31, 2013 as compared to $1.6 million, or 30% of income before income taxes, for the thirteen weeks ended March 25, 2012. The decrease in the tax expense as a percentage of income before income taxes was due to increased general business credits.

Liquidity

Our principal sources of cash have been net cash provided by operating activities and borrowings under our senior credit facilities. As of March 31, 2013, we had approximately $5.0 million in cash and cash equivalents and approximately $37.4 million of availability under our senior credit facilities (after giving effect to $2.6 million of outstanding letters of credit at March 31, 2013). Our need for capital resources is driven by our restaurant expansion plans, on-going maintenance of our restaurants and investment in our corporate and information technology infrastructures. Based on our current real estate development plans, we believe our combined expected cash flows from operations, available borrowings under our senior credit facilities and expected landlord lease incentives will be sufficient to finance our planned capital expenditures and other operating activities in fiscal 2013.

Consistent with many other restaurant and retail chain store operations, we use operating lease arrangements for the majority of our restaurant locations. We believe that these operating lease arrangements provide appropriate leverage of our capital structure in a financially efficient manner. Currently, operating lease obligations are not reflected as indebtedness on our consolidated balance sheet. The use of operating lease arrangements will impact our capacity to borrow money under our senior credit facilities. However, restaurant real estate operating leases are expressly excluded from the restrictions under our senior credit facilities related to the incurrence of funded indebtedness.

Our liquidity may be adversely affected by a number of factors, including a decrease in guest traffic or average check per guest due to changes in economic conditions, as described in our 2012 Annual Report on Form 10-K under the heading "Risk Factors."

The following table presents a summary of our cash flows for the thirteen weeks ended March 31, 2013 and March 25, 2012 (in thousands):

                                                           Thirteen Weeks Ended,
                                                        March 31,         March 25,
                                                          2013              2012
 Net cash (used in) provided by operating activities   $    (1,347 )     $     9,514
 Net cash used in investing activities                      (4,855 )          (9,113 )
 Net cash used in financing activities                      (2,487 )          (5,242 )

 Net decrease in cash and cash equivalents                  (8,689 )          (4,841 )
 Cash and cash equivalents at beginning of period           13,717            10,093

 Cash and cash equivalents at end of period            $     5,028       $     5,252

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Operating Activities. Net cash used in operating activities was $1.3 million for the thirteen weeks ended March 31, 2013, compared to net cash provided by operations of $9.5 million for the thirteen weeks ended March 25, 2012. The decrease in net cash provided by operating activities in the first thirteen weeks of 2013 compared to the same period in 2012 was due to an increase in cash expenditures in excess of the increase in cash receipts. This was primarily due to additional payroll and rent payments in 2013 related to the timing of the quarter end date in 2013 as compared to 2012. Cash receipts from operations for the first thirteen weeks of 2013 and 2012, including the net redemption of gift cards, were $100.0 million and $95.5 million, respectively. Cash expenditures from operations during the first thirteen weeks of 2013 and 2012 were $100.1 million and $87.1 million, respectively. We also received $2.5 million in additional tenant allowances in the first quarter of 2012 as compared to the inflows of tenant allowance in the first quarter of 2013.

Investing Activities. Net cash used in investing activities was $4.9 million for the thirteen weeks ended March 31, 2013, compared to $9.1 million for the thirteen weeks ended March 25, 2012. We invest cash to purchase property and equipment related to our restaurant expansion plans. The increase in spending was related to the timing of restaurant openings, the timing of spending related to our new restaurants as well as the number of restaurants that were opened and under construction during 2013 versus 2012. During the first thirteen weeks of 2013, we opened two restaurants and had one additional restaurant under construction. In the first thirteen weeks of 2012, we opened three restaurants and had two additional restaurants under construction.

Financing Activities. Net cash used in financing activities was $2.5 million for the thirteen weeks ended March 31, 2013, compared to cash used in financing activities of $5.2 million for the thirteen weeks ended March 25, 2012. For the thirteen weeks ended March 31, 2013, $1.4 million was used to pay down the Company's term debt, $1.0 million was used to repurchase Company shares and approximately $0.1 million was used for tax payments related to the withholding of shares to pay employees' tax liability upon the vesting of restricted stock. For the thirteen weeks ended March 25, 2012, $5.4 million was used to pay down the Company's term debt partially offset by $0.2 million in cash and tax benefits received during the quarter related to stock option exercises.

As of March 31, 2013, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties. Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.

Capital Resources

Future Capital Requirements. Our capital requirements are primarily dependent upon the pace of our real estate development program and resulting new restaurants. Our real estate development program is dependent upon many factors, including economic conditions, real estate markets, site locations and nature of lease agreements. Our capital expenditure outlays are also dependent on costs for maintenance and capacity additions in our existing restaurants as well as information technology and other general corporate capital expenditures.

We anticipate that each new restaurant on average will require a total cash investment of $1.5 million to $2.5 million (net of estimated lease incentives). We expect to spend approximately $0.4 million to $0.5 million per restaurant for cash pre-opening costs. The projected cash investment per restaurant is based on historical averages.

We currently estimate capital expenditures, net of estimated lease incentives, for the remainder of 2013 to be in the range of approximately $20.0 million to $22.0 million, for a total of $23.0 million to $25.0 million for the year. This is primarily related to the opening of five to six additional restaurants in the last three quarters of 2013, the start of construction of restaurants to be opened in early 2014, as well as normal maintenance related capital expenditures relating to our existing restaurants. In conjunction with these restaurant openings, the Company anticipates expensing approximately $3.3 million to $3.8 million in preopening costs for the remainder of 2013 for a total of approximately $4.0 million to $4.5 million for all of 2013.

Current Resources. Our operations have not required significant working capital and, like many restaurant companies, we have been able to operate with negative working capital. Restaurant sales are primarily paid for in cash or by credit card, and restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverage and supplies, therefore reducing the need for incremental working capital to support growth. We had a net working capital deficit of $25.2 million at March 31, 2013, compared to a net working capital deficit of $25.8 million at December 30, 2012.

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In connection with our initial public offering, we entered into a credit agreement with a syndicate of financial institutions with respect to our senior credit facilities. Our senior credit facilities provide for (i) a $45.0 million term loan facility, maturing in 2015, and (ii) a revolving credit facility under which we may borrow up to $40.0 million (including a sublimit cap of up to $10.0 million for letters of credit and up to $10.0 million for swing-line loans), maturing in 2015. Under the credit agreement, we are also entitled to incur additional incremental term loans and/or increases in the revolving credit facility of up to $20.0 million if no event of default exists and certain other requirements are satisfied. Our revolving credit facility is (i) jointly and severally guaranteed by each of our existing or subsequently acquired or formed subsidiaries, (ii) secured by a first priority lien on substantially all of our subsidiaries' tangible and intangible personal property, (iii) secured by a first priority security interest on all owned real property and (iv) secured by a pledge of all of the capital stock of our subsidiaries. Our credit agreement also requires us to meet financial tests, including a maximum consolidated total leverage ratio, a minimum consolidated fixed charge coverage ratio and a maximum consolidated capital expenditures limitation. At March 31, 2013, the Company was in compliance with its applicable financial covenants. Additionally, our credit agreement contains negative covenants limiting, among other things, additional indebtedness, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions, and other matters customarily restricted in such agreements and customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, defaults under other material debt, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the senior credit facilities to be in full force and effect, and a change of control of our business.

Borrowings under our senior credit facilities bear interest at our option of either (i) the Alternate Base Rate (as such term is defined in the credit agreement) plus the applicable margin of 1.75% to 2.25% or (ii) at a fixed rate for a period of one, two, three or six months equal to LIBOR plus the applicable margin of 2.75% to 3.25%. The applicable margins with respect to our senior credit facilities vary from time to time in accordance with agreed upon pricing grids based on our consolidated total leverage ratio. Swing-line loans under our senior credit facilities bear interest only at the Alternate Base Rate plus the applicable margin. Interest on loans based upon the Alternate Base Rate are payable on the last day of each calendar quarter in which such loan is outstanding. Interest on loans based on LIBOR are payable on the last day of the applicable LIBOR period and, in the case of any LIBOR period greater than three months in duration, interest shall be payable quarterly. In addition to paying any outstanding principal amount under our senior credit facilities, we are required to pay an unused facility fee to the lenders equal to 0.50% to 0.75% per annum on the aggregate amount of the unused revolving credit facility, excluding swing-line loans, commencing on October 26, 2010, payable quarterly in arrears. As of March 31, 2013, we had an outstanding principal balance of approximately $21.7 million on our term loan facility and no outstanding balance on our revolving credit facility.

Based on the Company's forecasts, management believes that the Company will be able to maintain compliance with its applicable financial covenants for the next twelve months. Management believes that the cash flow from operating activities as well as available borrowings under its revolving credit facility will be sufficient to meet the Company's liquidity needs over the same period.

OFF-BALANCE SHEET ARRANGEMENTS

As part of our on-going business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or variable interest entities ("VIEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of March 31, 2013, we are not involved in any VIE transactions and do not otherwise have any off-balance sheet arrangements.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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