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BLMN > SEC Filings for BLMN > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for BLOOMIN' BRANDS, INC.

Form 10-K for BLOOMIN' BRANDS, INC.


3-Mar-2014

Annual Report


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. Unless the context otherwise indicates, as used in this Report, the term the "Company," "we," "us," "our" and other similar terms mean Bloomin' Brands, Inc. and its subsidiaries.

Effective November 1, 2013, we acquired a controlling interest in the Brazilian Joint Venture and began consolidating its results on a calendar-based one-month lag. Accordingly, our operating results for 2013 include the operating results of the Brazilian operations for only a one-month post-acquisition period ended November 30, 2013. Prior to the acquisition, we accounted for the Brazilian Joint Venture under the equity method of accounting. We were responsible for 50% of the costs of restaurants operated by the Brazilian Joint Venture, and our joint venture partner was responsible for the other 50% and had operating control. Income and loss derived from the Brazilian Joint Venture for periods prior to the acquisition are presented in Income from operations of unconsolidated affiliates in our Consolidated Statements of Operations and Comprehensive Income (see "Liquidity and Capital Resources-Transactions").

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 31, 2013, we owned and operated 1,344 restaurants and franchised 164 restaurants across 48 states, Puerto Rico, Guam and 21 countries. We have five founder-inspired concepts: Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, Fleming's Prime Steakhouse and Wine Bar and Roy's. Our concepts seek to provide a compelling customer experience combining great food, highly attentive service and lively and contemporary ambience at attractive prices. Our restaurants attract customers across a variety of occasions, including everyday dining, celebrations and business entertainment. Each of our concepts maintains a unique, founder-inspired brand identity and entrepreneurial culture, while leveraging our scale and enhanced operating model. We consider Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill and Fleming's Prime Steakhouse and Wine Bar to be our core concepts. We are evaluating a plan to exit our Roy's concept, but have not established a timeframe or committed to a specific plan to do so.

The restaurant industry is a highly competitive and fragmented industry and is sensitive to changes in the economy, trends in lifestyles, seasonality (customer traffic patterns at restaurants are generally highest in the first quarter of the year and lowest in the third quarter of the year) and fluctuating costs. Operating margins for restaurants can vary due to competitive pricing strategies, labor and fluctuations in prices of commodities, including beef, chicken, seafood, butter, cheese, produce and other necessities to operate a restaurant, such as natural gas or other energy supplies. Restaurant companies tend to be focused on increasing market share, comparable restaurant sales growth and new unit growth. Competitive pressure for market share, commodity inflation, foreign currency exchange rates and other market conditions have had and could continue to have an adverse impact on our business.

Our industry is characterized by high initial capital investment, coupled with high labor costs. Chain restaurants have been increasingly taking share from independent restaurants over the past several years. We believe that this trend will continue due to increasing barriers that may prevent independent restaurants and/or start-up chains from building scale operations, including menu labeling, burdensome labor regulations and healthcare reforms that will be enforced once chains grow past a certain number of restaurants or number of employees. The combination of these factors underscores our initiative to drive increased sales at existing restaurants in order to raise margins and profits, because the incremental contribution to profits from every additional dollar of sales above the minimum costs required to open, staff and operate a restaurant is relatively high. Historically, we have not focused on growth in the number of restaurants just to generate additional sales. Our expansion and operating strategies have balanced investment and operating cost considerations in order to generate reasonable, sustainable margins and achieve acceptable returns on investment from our restaurant concepts.


Table of Contents
BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Our strategic plan and operating model entails maintaining an experienced executive management team and adapting practices from the consumer products and retail industries to complement our restaurant acumen and enhance our brand management, analytics and innovation. This model keeps the customer at the center of our decision-making and focuses on continuous innovation and productivity to drive sustainable sales and profit growth. In addition, we remain recommitted to new unit development after curtailing expansion from 2009 to 2011. We believe that substantial development opportunities remain for our concepts in the U.S. and internationally.

We continue to balance near-term growth in market share with investments to achieve sustainable growth. Across our restaurant system, we opened 46 restaurants (27 were domestic and 19 were international) and we increased system-wide sales by 3.4% in 2013 as compared to 2012. In addition, we grew blended comparable restaurant sales by 1.2% in 2013. Effective November 1, 2013, we completed the acquisition of a 90% controlling interest in the Brazilian Joint Venture which contributed 47 (as of the acquisition date) Company-owned locations to our restaurant base that were previously operated as an unconsolidated joint venture.

We recently completed an assessment of our restaurant base in advance of capital and development planning for the 2014 fiscal year. As a result of this assessment, we decided to close 22 underperforming locations primarily within the Outback Steakhouse concept. We expect to substantially complete these store closings by the end of the first quarter of 2014. In connection with this initiative, we incurred pre-tax asset impairment charges of approximately $18.7 million in the fourth quarter of 2013 and expect to incur approximately $5.0 million for non-cancelable operating lease liabilities and store closing costs in 2014. The lease liabilities will be recorded at the time that the location is closed.

The combination of macro-economic and other factors have put considerable pressure on sales in the casual dining industry both domestically and in our South Korean market . For example, the ongoing impacts of high unemployment, continued reduced access to credit, financial market volatility and unpredictability, governmental spending and budget matters, other national, regional and local regulatory and economic conditions, gasoline prices, reduced disposable consumer income and consumer confidence have had a negative effect on discretionary consumer spending. As these conditions persist, we will face increased pressure with respect to our pricing, traffic levels and commodity costs. We believe that in this environment, we will need to maintain our focus on value and innovation to continue to drive sales.

Partly attributable to the macro-economic conditions identified above, as well as the timing impact of certain items occurring earlier in 2014 than in 2013, we expect lower net income in the first quarter of 2014 as compared to the comparable 2013 period. Specifically, these items are primarily attributable to lower comparable sales trends driven by unfavorable weather conditions and marketing and initiative-driven increases in certain restaurant operating expenses in the first quarter, partially offset by the timing of our annual managing partner's conference, which is in the second quarter in 2014 rather than the first quarter in 2013.

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 per restaurant to measure
         changes in customer traffic, pricing and development of the brand;



•        Comparable restaurant sales-year-over-year comparison of sales volumes
         for domestic, 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,
         franchise and unconsolidated joint venture restaurants, regardless of
         ownership, to interpret the overall health of our brands;


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                             BLOOMIN' BRANDS, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


•        Adjusted restaurant-level operating margin, Adjusted income from
         operations, Adjusted net income, Adjusted diluted earnings per share,
         Adjusted diluted earnings per pro forma share, EBITDA and Adjusted
         EBITDA-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

• Customer satisfaction scores-measurement of our customers' experiences in a variety of key attributes.

2013 Business and Financial Highlights

Our 2013 business and financial results include:

•        An increase in consolidated revenues of 3.5% to $4.1 billion in 2013 as
         compared to 2012, driven primarily by an increase in sales from 69
         restaurants not included in our comparable restaurant sales base;



•        46 system-wide restaurant openings across most brands (41 Company-owned
         and five franchise locations), and significant progress in restaurant
         renovations including 84 at Outback Steakhouse and 41 at Carrabba's
         Italian Grill in 2013;



•        Productivity and cost management initiatives that we estimate allowed us
         to save approximately $59.0 million in the aggregate in 2013, while our
         costs increased due to rising commodity prices;



•        Income from operations of $225.4 million in 2013 compared to $181.1
         million in 2012, which was primarily due to an increase in expenses of
         $42.1 million associated with our IPO in August 2012 that were not
         incurred in 2013, lower General and administrative expenses combined
         with $4.4 million in higher operating margins at the restaurant level
         and partially offset by higher charges for asset impairment and
         restaurant closings and depreciation and amortization;

• A reduction of $9.0 million in our required interest payments related to the repricing of OSI's senior secured term loan B facility; and

•        Acquiring a controlling interest in our Brazilian Joint Venture
         representing 47 restaurant locations in Brazil (as of the acquisition
         date).

Growth Strategies

In 2014, our key growth strategies include:

•        Grow Comparable Restaurant Sales. We plan to continue to remodel our
         restaurants, use limited-time offers and multimedia marketing campaigns
         to drive traffic, selectively expand the lunch daypart and introduce
         innovative menu items, including through extensive menu refresh
         initiatives at Carrabba's Italian Grill and Bonefish Grill, that match
         evolving consumer preferences.



•        Pursue New Domestic Development Opportunities with Strong Unit Level
         Economics. We believe that a substantial development opportunity remains
         for our concepts in the U.S. Our top domestic development priority is
         Bonefish Grill unit growth. We expect to open between 55 and 60
         system-wide locations in 2014 of which we expect that approximately 50%
         will be domestic opportunities.


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                             BLOOMIN' BRANDS, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


•        Pursue New Strategic International Development in Selected Markets. We
         believe the international business represents a significant growth
         opportunity and that we are well-positioned to continue to expand our
         concepts outside the U.S. We continue to focus on existing geographic
         regions in Latin America and Asia, with strategic expansion in selected
         emerging and high growth developed markets. We are focusing our existing
         market growth in Brazil and new market growth in China and Mexico. We
         expect that approximately 50% of our new units in 2014 will be
         international opportunities, but will shift to a higher weight of
         international units as we continue to implement our international
         expansion plans.

We intend to fund our growth efforts utilizing productivity initiatives across our business. Productivity savings will be reinvested in the business to drive revenue growth and margin improvement.

Change in Fiscal Year End

On January 3, 2014, our Board of Directors approved a change in our fiscal year end from a calendar year ending on December 31 to a 52-53 week year ending on the last Sunday in December, effective beginning with fiscal year 2014. In a 52 week fiscal year, each of our quarterly periods will comprise 13 weeks. The additional week in a 53 week fiscal year is added to the fourth quarter, making such quarter consist of 14 weeks. Our first 53 week fiscal year will occur in fiscal year 2017. We will make the fiscal year change on a prospective basis and will not adjust operating results for prior periods. The change to our fiscal year does not impact the full year results for fiscal year 2013 ending on December 31, 2013, which are reported on a calendar year. However, the change will impact the prior year comparability of each of our fiscal quarters and annual period in 2014. We believe this change will provide numerous benefits, including aligning our reporting periods to be more consistent with peer restaurant companies and improving comparability between periods by removing the effect of trading day on Restaurant sales and operating margins.

The reporting periods and applicable reports for fiscal year 2014 will be as follows:

        FISCAL PERIOD                REPORTING PERIOD             REPORT TO BE FILED
                                January 1, 2014 to March
First quarter of fiscal 2014    30, 2014                     Quarterly Report on Form 10-Q
                                March 31, 2014 to June 29,
Second quarter of fiscal 2014   2014                         Quarterly Report on Form 10-Q
                                June 30, 2014 to September
Third quarter of fiscal 2014    28, 2014                     Quarterly Report on Form 10-Q
                                January 1, 2014 to
Fiscal year 2014                December 28, 2014            Annual Report on Form 10-K

We will continue reporting our Brazilian operations, on a calendar-based one-month lag. All other international operations will be reported on a 52-53 week reporting period contemporaneously with the domestic operations.

The change in our fiscal year end will result in three fewer operating days in the 2014 fiscal year compared to calendar year reporting. The three operating days lost in the 2014 fiscal year (December 29 - 31, 2014) typically represent high revenue days due to the holiday season. In addition to the loss of operating days in December 2014, there will also be operating day shifts in the quarterly periods in 2014, which will have an impact on our quarterly financial results.

Ownership Structures

Our restaurants are predominantly Company-owned or operated under franchise arrangements. We generate our revenues primarily from our Company-owned restaurants and secondarily through ongoing royalties from our franchised restaurants and sales of franchise rights.

Company-owned restaurants include restaurants owned directly by us, by limited liability companies in which we are a member, by partnerships in which we are a general partner and our managing partners and chef partners are limited partners and by corporations in which we are a shareholder. Our legal ownership interests in these limited liability


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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

companies, as general partner, in these limited partnerships and as a shareholder, in these corporations, generally range from 55% to 100%. Our cash flows from these entities are limited to the portion of our ownership. The results of operations of Company-owned restaurants are included in our consolidated operating results. The portion of income or loss attributable to the other partners' interests is eliminated in Net income attributable to noncontrolling interests in our Consolidated Statements of Operations and Comprehensive Income.

We do not plan to continue utilizing partnerships for domestic Company-owned restaurants, except where required by laws regulating licensing of alcoholic beverages. Instead, the restaurants will be wholly-owned by us through corporations or limited liability companies and the area operating, managing and chef partners will receive their distributions of restaurant cash flows as employee compensation rather than partnership distributions.

We pay royalties on approximately 95% of our Carrabba's Italian Grill restaurants ranging from 1.0% to 1.5% of sales pursuant to agreements we entered into with the Carrabba's Italian Grill founders.

Historically, Company-owned restaurants also included restaurants owned by our Roy's joint venture and our consolidated financial statements included the accounts and operations of our Roy's joint venture even though we had less than majority ownership. Effective October 1, 2012, we purchased the remaining interests in our Roy's joint venture from our joint venture partner, RY-8, for $27.4 million, (see "-Liquidity and Capital Resources-Transactions").

Prior to November 1, 2013, we held a 50% ownership interest in the Brazilian Joint Venture through a joint venture arrangement with PGS Participaηυes Ltda ("PGS Par"). The Brazilian Joint Venture was formed in 1998 for the purpose of operating Outback Steakhouse restaurants in Brazil. Effective November 1, 2013, we, through a wholly owned subsidiary, completed the acquisition of a controlling interest in the Brazilian Joint Venture by purchasing 80% of the issued and outstanding capital stock of PGS Par. We now hold a 90% interest in the Brazilian Joint Venture. We completed the acquisition for total consideration of approximately R$240.8 million (BRL) (or approximately $110.4 million) in cash (see "Liquidity and Capital Resources-Transactions").

Prior to the acquisition, we accounted for the Brazilian Joint Venture under the equity method of accounting. We were responsible for 50% of the costs of restaurants operated by the Brazilian Joint Venture, and our joint venture partner was responsible for the other 50% and had operating control. Income and loss derived from the Brazilian Joint Venture is presented in Income from operations of unconsolidated affiliates in our Consolidated Statements of Operations and Comprehensive Income. Restaurants owned by the Brazilian Joint Venture are included in "Unconsolidated Joint Venture" restaurants for periods prior to the acquisition.

We derive no direct income from operations of franchised restaurants other than initial and developmental franchise fees and ongoing royalties, which are included in Other revenues in our Consolidated Statements of Operations and Comprehensive Income.


Table of Contents
                             BLOOMIN' BRANDS, INC.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


The table below presents the number of our restaurants in operation at the end
of the periods indicated:

                                                     DECEMBER 31,
                                                 2013    2012    2011
Number of restaurants (at end of the period):
Outback Steakhouse
Company-owned-domestic                             663     665     670
Company-owned-international (1) (2)                169     115     110
Franchised-domestic                                105     106     106
Franchised and joint venture-international (1)      51      89      81
Total                                              988     975     967
Carrabba's Italian Grill
Company-owned                                      239     234     231
Franchised                                           1       1       1
Total                                              240     235     232
Bonefish Grill
Company-owned                                      187     167     151
Franchised                                           7       7       7
Total                                              194     174     158
Fleming's Prime Steakhouse and Wine Bar
Company-owned                                       65      65      64
Roy's
Company-owned                                       21      22      22
System-wide total                                1,508   1,471   1,443


____________________


(1) Effective November 1, 2013, we acquired a controlling interest in the Brazilian Joint Venture resulting in the consolidation and reporting of 47 restaurants (as of the acquisition date) as Company-owned locations, which are reported as unconsolidated joint venture locations in the historical periods presented.

(2) The restaurant count for Brazil is reported as of November 30, 2013 to correspond with the balance sheet date of this subsidiary and, therefore, excludes two restaurants that opened in December 2013. Restaurant counts for our Brazilian operations were reported as of December 31st in the historical periods presented.

We operate restaurants under brands that have similar economic characteristics, nature of products and services, class of customer and distribution methods, and as a result, we aggregate our operating segments into a single reporting segment.


Table of Contents
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, percentages that items in our Consolidated Statements of Operations and Comprehensive Income are in relation to Total revenues or Restaurant sales, as indicated:

                                                          YEARS ENDED DECEMBER 31,
                                                      2013          2012          2011
Revenues
Restaurant sales                                       99.0  %       99.0  %       99.0  %
Other revenues                                          1.0           1.0           1.0
Total revenues                                        100.0         100.0         100.0
Costs and expenses
Cost of sales (1)                                      32.6          32.5          32.2
Labor and other related (1)                            28.3          28.3          28.8
Other restaurant operating (1)                         23.6          23.3          23.4
Depreciation and amortization                           4.0           3.9           4.0
General and administrative (2)                          6.5           8.2           7.6
Recovery of note receivable from affiliated
entity                                                    -             -          (0.9 )
Provision for impaired assets and restaurant
closings                                                0.6           0.3           0.4
Income from operations of unconsolidated
affiliates                                             (0.2 )        (0.1 )        (0.2 )
Total costs and expenses                               94.5          95.5          94.4
Income from operations                                  5.5           4.5           5.6
Loss on extinguishment and modification of debt        (0.4 )        (0.5 )           -
Gain on remeasurement of equity method
investment                                              0.9             -             -
Other (expense) income, net                             (*)           (*)             *
Interest expense, net                                  (1.8 )        (2.2 )        (2.2 )
Income before (benefit) provision for income
taxes                                                   4.2           1.8           3.4
(Benefit) provision for income taxes                   (1.0 )         0.3           0.6
Net income                                              5.2           1.5           2.8
Less: net income attributable to noncontrolling
interests                                               0.2           0.3           0.2
Net income attributable to Bloomin' Brands              5.0  %        1.2  %        2.6  %

Net income                                              5.2  %        1.5  %        2.8  %
Other comprehensive income:
Foreign currency translation adjustment                (0.4 )         0.2          (0.1 )
Reclassification of accumulated foreign currency
translation adjustment for previously held
equity investment                                       0.1             -             -
Comprehensive income                                    4.9           1.7           2.7
Less: comprehensive income attributable to
noncontrolling interests                                0.2           0.3           0.2
Comprehensive income attributable to Bloomin'
Brands                                                  4.7  %        1.4  %        2.5  %


____________________
(1) As a percentage of Restaurant sales.

(2) General and administrative costs exclusive of $42.1 million of IPO related expenses would have been 7.1% of Total revenues for the year ended December 31, 2012 (see "-General and administrative expenses" discussion).

* Less than 1/10th of one percent of Total revenues.


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